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Office of Small & Disadvantaged Business Utilization

Dependence On Non-Veterans or Entities Brief

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Issue:  How can a SDVOSB/VOSB avoid the Center for Verification and Evaluation (CVE) determining that the applicant is improperly “dependent” upon non-Veterans or entities?  How is “dependence” upon other non-Veterans or entities determined?

The Regulation

38 CFR § 74.4

  • (i)(4) “Non-Veterans or entities may be found to control or have the power to control…when “[b]usiness relationships exist with non-Veterans or entities which cause such dependence that the applicant or participant cannot exercise independent business judgment without great economic risk.”

Rationale

Examples of evidence that will support CVE finding of dependence in conflict with this subsection and that will prohibit an applicant from receiving verified status:

  1. The applicant is receiving business resources necessary to operate, such as employees, equipment, office and/or warehouse space, at little or no cost to the applicant, and absent a VA-approved mentor-protégé agreement (See VA Acquisition Regulation 48 CFR Chapter 8, Subpart 819.71).

  2. The Veteran is a current employee or recent former employee of a minority owner; or, the Veteran lacks experience/knowledge with respect to controlling the applicant compared to minority ownership.

  3. The applicant is a franchisee where mandatory requirements of how to operate various aspects of the business are outlined in the franchise agreement by the franchisor entity in order for the applicant to continue operating as a business franchisee.

CVE reasons that such situations are indicative of impermissible dependence and the applicant bears the burden of proving that it is an independent business that can function without resources from other non-Veterans/entities unless furnished at fair market value.  If the Veteran firm cannot demonstrate that it controls its resources, then it cannot meet this burden of proof.

Scope of Review

CVE reviews corporate/company documentation as its primary means of determining whether or not there may be impermissible dependence on non-Veterans/entities. If your firm’s application has similar issues, the best means to improve your application is by providing detailed written explanations and business documentation showing that the Veteran owner(s) have independent resources and make final controlling decisions with respect to the company’s business.

Example

The applicant firm is co-located with a larger, longer established firm:

  • Provide CVE with a lease agreement identifying that the applicant pays fair market value for its space.

  • Provide CVE with pictures showing that you are in separately identifiable space.

  • Provide CVE with documentation of the applicant’s earnings showing that the firm can afford to make fair market value payments for its office space.

  • Provide legally binding contracts or agreements providing for payment of fair market value for use of a non-Veteran entity’s resources.

*For Informational Purposes Only*

This information has been provided by CVE for general informational purposes and should not be construed as providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem.  In addition, CVE makes no representation as to the accuracy or whether the above information is currently up-to-date.  All applicants must read the applicable regulations and determine how best to meet these requirements.  The Verification Assistance Briefs do not constitute legal notice or replace the regulations.

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