8(a) Graduation: A Survival Guide

Key Takeaways

• More than 50% of 8(a) program graduates will lose virtually all of their federal revenue within five years
• Subscale, undiversified, and undifferentiated companies are historically most likely to fail in the years following 8(a) graduation
• There are several proactive steps that 8(a) contractors can take to not only survive but thrive after graduating from the 8(a) program, including building robust business development strategies, differentiating offerings, and building strong partnerships

Most 8(a) Graduates Fail After Exiting Program

The Small Business Administration's 8(a) Business Development program is a nine-year program designed to help companies owned and controlled by socially and economically disadvantaged individuals to compete effectively for federal contracts.  In government fiscal year 2022, approximately $21.1 billion in contracts were set aside for firms participating in the 8(a) program.  

However, while the program has substantial benefits for participants, upon exit from the program, many firms struggle to continue winning work with the federal government without access to contracts set aside for 8(a) firms.  Our analysis of approximately 5,000 companies¹ that graduated from the 8(a) program between 2010 and 2022 shows that within five years, the average company experienced a 47% decline in federal obligations after graduation, and the median firm experienced an 87% decline in federal obligations.  

8(a) Federal Prime Obligations Before and After Graduation (Graduation Year = 100%)

HigherGov Analysis.  Includes companies that exited the 8(a) program between 2010 and 2022.

By year five after graduation, only 23% of companies had more federal obligations than they did at graduation, and 63% had declined in size by more than half.  While it can take several years after graduation to judge if a company has failed², the trend in the most recent available years is negative.  Approximately 55% of firms that graduated in 2017 had shrunk by more than 80% after five years versus only 43% of firms that graduated in 2013.  While it's not clear from the data what is driving the decline, it may reflect the overall decline in small business activity in the federal market.

5 Year Post-Graduation Federal Obligations (Graduation Year = 100%)

HigherGov Analysis.  Includes companies that exited the 8(a) program between 2010 and 2017.

Strategies for Success After 8(a) Graduation

Despite the challenges many firms face after graduating from the 8(a) program, a meaningful percentage thrive.  Companies can take several concrete steps to increase their likelihood of success upon exiting the 8(a) program.  Many of these strategies work best when started earlier in the 8(a) program, but firms at all stages can benefit.

Build Advanced Business Development Strategies

Building scale within the government market quickly during the 8(a) program is critical to increasing the likelihood of succeeding at the end of the program.  Larger firms can price contracts more competitively by spreading their overhead and G&A burden over more contracts.  This is critical after exiting the 8(a) program, where firms will face more competition based on price and capabilities.  

As our analysis below shows, companies that have scaled beyond $5 million in federal obligations by the time of graduation have significantly lower failure rates than smaller companies.  

Post-Graduation 8(a) Failure Rate by Federal Obligations at Graduation

HigherGov Analysis.  Failure is defined as having federal obligations decline by more than 80% five years after graduation.

Partner with Graduating 8(a) Firms

One of the most effective ways to scale early in the 8(a) program is to identify successful companies that will graduate from the 8(a) program soon and will need prime 8(a) partners to continue performing work (as a subcontractor).  HigherGov maintains a list of all contractors that will exit from the 8(a) program in the next year here.  

Capture 8(a) Recompetes from Vulnerable Incumbents

Another highly effective strategy is identifying relevant contracts where the incumbent awardee will graduate from the 8(a) program before the contract will recompete, preventing the incumbent from priming the contract again.  Finding these opportunities allows a new 8(a) contractor to either partner with the incumbent on the recompete or prepare to compete as a prime by identifying appropriate partners, marketing to relevant contracting officers, or preparing for solicitations in advance. 

HigherGov maintains a list of contracts where the incumbent will graduate from the program before recompete here.  

Proactive Business Development

In addition to the above, developing advanced business development strategies early in the 8(a) program helps a company scale during the 8(a) program and best positions it to compete outside the program.  Some of the most effective strategies for 8(a) firms include monitoring and shaping forecast opportunities, monitoring recently awarded contracts that have subcontracting requirements for small businesses (including 8(a) firms), and developing dedicated subcontracting strategies.

Differentiate and Build Proprietary Offerings 

Pursue Differentiated Contracts

Based on our analysis, the likelihood of a company successfully graduating from the 8(a) program is highly correlated with its ability to offer differentiated services.  Pursuing contracts under the 8(a) program that provide unique past performance will better position a company to compete and win sole source and competitive contracts after graduating. 

As shown below, some categories of contracts are generally easier to translate or leverage into non-8(a) positions after graduation.  Post-graduation failure rates for professional services companies (which includes engineering and software development) are lower than for other types of contractors.  For companies in markets such as construction, the data suggest contractors will need to work harder to build differentiated offerings and succeed post-graduation by finding opportunities with unique complexity or in niches, such as with technologically advanced projects or projects with security clearance requirements.

Post-Graduation 8(a) Failure Rate by Business Type

HigherGov Analysis.  Failure is defined as having federal obligations decline by more than 80% by year five after graduation.

Build a Brand and Proprietary Offerings

Building a brand in the federal market is an effective tactic to help win competitive solicitations.  Known brands are better able to attract partners, shape opportunities, and position themselves in best value competitive solicitations.  

Likewise, branding services or products, even if they are not proprietary, can be an effective tactic to help contracting officers justify shaping 8(a) opportunities to full & open (or a general small business set aside) after graduation or adding requirements that can help an incumbent continue doing superior work in a recompete.

Diversify Contract Sources

Grow Non-8(a) Business as Early as Possible

During the last five years of the 8(a) program, contractors must meet non-8(a) revenue targets starting at 15% in the first transitional year and increasing to 50% by the final year.  Our data shows that the average graduating 8(a) firm is not meeting the 50% target, with approximately 54% of contracts coming from 8(a) sources in the final program year.  

In addition to meeting these objectives, building a book of non-8(a) business early in the 8(a) program better positions a company to have the experience necessary to compete effectively in the competitive market and reduce the percentage of work that needs to be converted upon graduation.  

8(a) Participants Obligation Set-Asides Graduation vs. 5 Years Post Graduation

HigherGov Analysis.  Note that companies that win long-term contracts may continue to benefit from 8(a) set-asides long after graduation - as shown above, after five years, the average 8(a) contractor still earns almost 19% of its federal obligations from 8(a) set-asides.  

Take Full Advantage of Other Socioeconomic Certifications

Obtaining additional certifications can allow a company to continue winning limited competition work outside the 8(a) program.  Many 8(a) graduates will be eligible for HubZone, Women-Owned Small Business, or Veteran-Owned Small Business certifications.  Obtaining these certifications during the 8(a) program can position a company to gain experience and increase the percentage of work outside the 8(a) program earlier in the program.  

Build Past Performance and Vehicle Access 

The 8(a) program provides a unique opportunity to build past performance that can be used outside the program.  Critical past performance to build includes completing work with requirements for performance evaluations (CPARs) as well as contracts covering multiple target NAICS and agencies.

The 8(a) program also provides a unique opportunity to obtain access to contract vehicles.  Multi-year contract vehicles are an effective way for a contractor to access limited competition procurement routes.  Additionally, many contract vehicles have socioeconomic subcontracting requirements for prime vehicle holders.  An 8(a) that joins the team of a prime vehicle holder and successfully supports task orders under that vehicle can then position itself for a prime position on the vehicle when it next recompetes.   

Develop Joint Ventures and Subcontracting Relationships 

One of the most viable paths for continuing to perform work won during the 8(a) program after exiting the program is to form relationships with new entrants into the 8(a) program where the graduating company acts as a subcontractor to the new 8(a).  While subcontracting work will often result in a revenue decrease, the decline in revenue can often be partially offset by increased margins if the subcontract is structured and negotiated successfully.  

As the past performer on the contract, being an actively participating subcontractor during the proposal stage dramatically increases the likelihood of the new prime winning the contract.  

These subcontracting relationships can be structured either as one-off teaming agreements or by forming formal mentor-protege relationships and joint ventures.

We recommend graduating companies target new 8(a) companies with a history of winning relevant federal contracts early in the 8(a) program, as those companies are the most likely to win prime contracts and remain viable partners on subsequent recompetes. 

Sell the Company (Maybe)

Some advisors may suggest selling a business at the end of the 8(a) program to avoid the risks of declining revenue.  While this is a viable option for some companies, there are several potential downsides. 

First, if a company has a high percentage of 8(a) work and does not have a clear path to converting that work to full & open or unique capabilities that will allow it to compete in competitive acquisitions, the buyer universe will likely be limited to other 8(a) companies that can successfully recompete the contracts.  Since most 8(a) firms (outside of some Tribal entities) have limited resources or acquisition experience, the pool of potential acquirers will be further limited.  

Second, valuation multiples for 8(a) contracts tend to be significantly lower than for full & open contracts.  While discounts will vary widely by sub-sector and market cycle, valuation discounts for 8(a) contractors are typically 50% or more than for equivalent full & open contractors.  For example, suppose the average contractor is selling for ~12-14x EBITDA, as has been the average over the last couple of years.  In that case, the ceiling valuation for an average contractor where most of its work is 8(a) is likely to be 6-7x EBITDA unless it has a clear path to converting to full & open contracts or truly unique capabilities.  

Author

Justin Siken
Founder of HigherGov
justin.siken@highergov.com
LinkedIn 

Notes on Methodology

1.  Analyses exclude firms that were part of the 8(a) program but had no active federal contracts at graduation.  This removed approximately 1,500 firms (or 30%) from the analyses.

2.  Failure analyses only include companies that graduated from the 8(a) program before 2018.