What Does It Mean to Be a Certified Diverse Owned Business
What follows is an excerpt from Chapter 2 (Why Certify) of our book Certify & Sell: Your Guide to Certification & Supplier Diversity.
We get frequent calls from semi-panicked business owners whose client has just asked if they’re a certified diverse business. A surprising number of them ask us what that means; many think they qualify as MBE or WBE or veteran business enterprise (VBE); a lesser number know about LGBTBE (lesbian-, gay-, bi-sexual-, or transgender-owned) or DOBE (disabled-owned) certification opportunities. The conversation begins to look and feel like one of our programs as one of us explains the definitions:
- Diverse Business: must be at least 51% owned, operated, governed, and controlled by U.S. minorities[1] or women. This designation could also include people with a disability, with veteran or service-disabled veteran status, or who are lesbian, gay, bisexual, or transgender, depending on the certifying agency in question.
- Certification: formal review process designed so only firms that meet eligibility criteria obtain certified status.
Certification is actually a co-dependent relationship. The business is being certified as having the capability to provide its products and/or services, and its diverse owner(s) must possess the knowledge and skill to run the business. This means that the business’s diversity certification is reliant on its owner(s)! And, we have to know how to get the work that falls under our NAICS code(s).
Abator’s primary codes are 541512, Computer Systems Design Service, “primarily engaged in planning and designing computer systems that integrate computer hardware, software, and communication technologies,” or 541511, Custom Computer Programming Service, “primarily engaged in writing, modifying, testing, and supporting software to meet the needs of a particular client.” This means that the owners of our business need to able to plan, design, and implement software either personally or have the skills to identify and manage the staff that does.
Did you notice the words “governed” or “controlled” in the description for a diversity business? The thing is, just because the owners might meet the designation and percentage of ownership doesn’t mean they have been given the power or authority to govern and control the business. “Governance” boils down to the language in the governing documents[2] of the business, and certifiers will make sure that there are no restrictions on the diverse owner’s ability to control the business, while “control” means the diverse owner(s) must have the authority and “power to direct or determine” or influence what will happen in the business, both now and in the future.
When it comes to control, there are two pretty simple conditions that must be met by the diverse owner(s):
- Financial control: the owner’s signature on bank documents or contracts with the bank or other creditors and business credit cards bearing the owner’s name and signature with a history of significant business-related purchases.
- Management control: negotiation of and the owner’s signature on contracts with customers and vendors; hiring and firing decisions, including performance evaluations; supervision of business operations; office management; entering into lease or property agreements; marketing and sales; and purchasing major equipment.
Management control is usually straight forward: the diverse owner must be seen executing the responsibilities that they have been authorized to handle, either by themselves or directing others who perform tasks. Governance can be tricky. The diverse owner must have the title that is considered the highest leadership role, generally something like “president,” “CEO,” “chairperson,” or “managing partner/member.” In the business’s managing documents, such as bylaws or operating agreement, the diverse owner must have the responsibilities to go with it, such as diverse owner(s) must have executive power over the affairs and property of the business, power to carry out policies and programs, all powers of the office, and the power to execute deeds, bonds, mortgages, other contracts, agreements, and other legal instruments. They must also perform all duties of the office.
A business with a single owner should be easy, right? As a sole proprietor, perhaps, but with the highly popular one-person limited liability company (LLC), an operating agreement is required and the diverse owner’s title and executive role must be explicitly defined.
Don’t save money on legal advice if you want to be a certified diverse business. Your second cousin practicing family law probably doesn’t know every twist in language that might affect an owner’s ability to get their business certified. A business law or civil attorney is a good investment, and a business owner ought to make sure that the lawyer understands what they want regarding certification status.
Owners need to read and re-read those documents carefully, asking questions about anything not completely understood. You will find a ton of legalese throughout, but any of us should be able to recognize some of the phrasing. For example, if the business has a 51/49 split in ownership, there should be no language that indicates equal risk and reward, and the word “unanimous” should not appear!
To be certified, that 51% risk and 51% share of any rewards is a key to the diverse owner’s ability to get certified. Any arrangement that has the diverse person not owning and controlling the lion’s share (51% minimum) of the business is unlikely to be certifiable. And, the 51% owner should have larger contribution numbers—again, at least 51% of the funds or equipment or finances used when starting the business should come from this owner. If a 51% LLC has a clause that says something like 80% of the members must agree on something to make a decision or policy, that 51% diverse owner is not in charge on paper—how do you get 80% when 51% and 49% disagree? Note any clause that seems to give the lesser owner permission to make decisions without the diverse owner. Beware if the lesser owners can overrule any decisions or actions the 51% diverse owner(s) wants to make.
Eligibility requirements met: Congratulations, you and your business are certifiable! But, are you sure you want to be?
To determine that and to learn more about the certification process you can purchase a copy of our book Certify & Sell: Your Guide to Certification & Supplier Diversity from Amazon.
[1] For information on international minority definitions, check out Chapter 20 International Certifiers
[2] Each type of business structure has its own type of governing documents.