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Office of Small & Disadvantaged Business Utilization

Control of Strategic Policy and Day-to-Day Operations Brief

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Issue:  How do Veterans demonstrate Control of Strategic Policy and Day-to-Day Operations?

Definition:  Day-to-day management:  means supervising the executive team, formulating sound policies and setting strategic direction.

Day-to-day operations:  means supervising the marketing, production, sales, and administrative functions of the firm.

The Regulation

38 CFR § 74.4

As it relates to control of strategic policy and day-to-day operations:

  • (a) &ldquop;Control means both the day-to-day management and long-term decision - making authority for the VOSB…”

  • (b) “Control is not the same as ownership, although both may reside in the same person.  The Center for Verification and Evaluation (CVE) regards control as including both the strategic policy setting exercised by boards of directors and the day-to-day management and administration of business operations…”

What This Means

  • Examples of day-to-day operations of the company include assigning of check signing authority, the hiring and firing of employees, and assignment of ownership rights of company property.

  • If an owner resides in a state other than where the applicant operates, the Veteran is presumed not to have the requisite control of strategic policy and day-to-day operation of the applicant.  The Veteran or service-disabled Veteran can submit evidence to support control of day to day operations and strategic decision making through a letter of explanation that would state how he/she manages strategic policy and day-to-day operations for example:  while residing in a state other than where the subject company operates.

  • Provisions located in the applicant’s various agreements or formation documents cannot restrict the service disabled Veteran’s ability to manage the daily business operations of the subject company.

Excerpts from Current Denial Letters

  • “According to 38 CFR § 74.4(b), ‘[c]ontrol is not the same as ownership, although both may reside in the same person.  CVE regards control as including both the strategic policy setting exercised by boards of directors and the day-to-day management and administration of business operations.  An applicant or participant’s management and daily business operations must be conducted by one or more Veterans or service-disabled Veterans.’  The applicant concern has agreed to operate under the terms of the ZZZ, Inc. Franchise Agreement.  The Franchise Agreement contains numerous provisions in Article V, “Your Duties,’ that restrict the service-disabled Veteran’s ability to set strategic policy for the corporation and manage the day-to-day operations.  For example, Article V, section B.1 states, “[n]o other services other than those authorized by this Agreement may be offered or conducted from Your office.’  Section B.4 states, ‘[a]ny deviation from the suggested interior layout and design provided to You by Us for establishing Your new business must be approved in advance in writing.’  Section G states, ‘ …implement Our programs in Your territory.’  As these provisions restrict the service disabled Veteran’s ability to manage the daily business operations of the concern; there fore, CVE cannot conclude that the requirements of 38 CFR § 74.4(b) have been satisfied.”

  • “Furthermore, according to 38 CFR § 74.4(b), ‘An applicant or participant’s management and daily business operations must be conducted by one or more…service-disabled Veterans…’ CVE defines control to include, ‘the day-to-day management and administration of business operations.’  38 CFR § 74.4(b).  All checks, contracts, and the applicant’s lease agreement have been signed by non-Veteran Member, Jack Black.  Based on the documentation provided, CVE cannot reasonably conclude that the service-disabled Veteran is involved with managing the daily business operations of this concern.  As a result the requirements of 38 CFR § 74.4(b) have not been satisfied.”

  • “According to 38 CFR § 74.4 (a), &lsqou;[c]ontrol means both the day-to-day management and long-term decision-making authority for the [SD]VOSB.’  All the cancelled checks provide by the applicant were signed by Jane Smith, non-Veteran.  In addition, the non-Veteran is listed as the President on the applicant’s Small Business Administration (SBA) and Dun & Bradstreet (D&B) profiles.  Based upon this evidence as well as the fact that the Veteran is employed during the day with the US Postal Service, CVE cannot conclude that John Smith (Veteran) manages the day-to-day operations of the applicant and therefore does not meet the control requirements of 38 CFR § 74.4 (a).”

  • “Moreover, ‘[a]n applicant or participant’s management and daily business operations must be conducted by one or more… service-disabled Veterans…’ and ‘[c]ontrol means both the day-to-day management and long-term decision-making authority for the VOSB…’ 38 CFR § 74.4(b) 38 CFR § 74.4(a).  Section K.1 of the Stock Purchase and Sale Agreement states that ‘… if at any time purchasers are in default on said payments, grant Sellers total management authority with respect to the conduct of the business and veto power with respect to expenditures and all other matters connected with the carrying on of the daily affairs of the business.’  Additionally, Section D.2 states that, ‘[t]he Notes are for a term of nine (9) years with payments to be made quarterly.’  As the agreement was entered into on January 15, 2007, this condition is effective until January 15. 2016.  The grant sellers are identified as John Smith (service-disabled Veteran) and Jane Smith (non-Veteran).  Because the applicant has two grant sellers, only one of whom is a service-disabled Veteran, and as both grant sellers have equal managerial control until the Note is paid in full or until the end of the term, a non-Veteran can potentially control the day-to-day and long-term decisions of the applicant.  Therefore, CVE cannot reasonably conclude that the requirements of 38 CFR § 74.4 have been satisfied.”

*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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