Focus, Human Resources, and Sustainability

Minority-owned firms face transition challenges

If certification is a key to continued success, the buyer pool may be shallow.

November 6, 2015
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Owners of certified minority-, women-, LGBT- or veteran-owned businesses have a few unique considerations to think about when it comes to planning for their company’s prosperous future.

That’s because, in some cases, part of the value of the business lies in its minority-owned certification, and new leadership or a sale could lead to a loss of that certification and therefore its value.

“What happens on a sale extremely often is a company will be sold to a buyer that is itself not qualified as a minority-owned business,” said Tracy Larsen, a partner with the law firm of Barnes & Thornburg.

“When that happens, they lose the status, and there is really no way to avoid that unless another minority-owned business is buying.”

To receive certification as a minority-owned or other diversely owned business, 51 percent of a company must be minority owned, and that person must have a day-to-day, hands-on role in running the organization.

One of the primary reasons for obtaining minority-owned certification is to gain business — particularly federal contracts, which include a mandate related to working with diverse suppliers — but also with companies that have supplier-diversity policy requirements in place.

For instance, Herman Miller recently celebrated 25 years of its supplier diversity program. The company places a high value on having certified diverse-owned suppliers, emphasized by its goal of having 20 percent certified suppliers by 2020.

Kavy Lenon, senior supplier diversity manager at Herman Miller, said the company is paying attention to changes taking place with its supplier companies related to their certification.

“We need to look at succession planning for some of the key business owners,” she said.

She said the company has already lost diversity dollars due to ownership transitions — something it needs to plan for in the future to ensure it maintains the gains it’s made in its spending with diverse suppliers.

“Just like in our HR department where we need to make sure we have a succession plan for our executive and key leaders within our organization, it’s the same concept with the supply chain. We want to make sure we are going to get the same service and partnership we’ve had,” she said.

Larsen noted, in some cases, if the diversity dollars are a driving factor in the relationship, the customer might go out looking for a competing company with minority-owned certification to make the needed component.

“It doesn’t always happen, but it is an issue in the sale of every minority-owned business,” he said.

Larsen said if a company’s value is strongly tied to a contract that is dependent on its certification, the business might not receive as high a valuation because of the risk it could lose that business with the sale. Additionally, if a business looks specifically for another certified minority-owned business to sell to, that could decrease the price it sells for because it decreases buyer competition.

“The valuation could be less because you lose the benefit of having typical private equity funds or large corporations in the bidding process,” he said.

Michael Davenport, co-owner of Jireh Metal Products, which is a certified minority-owned business in Grandville, said although he won’t be thinking about making a sale anytime soon — he acquired the company less than a year ago — he agrees that, when the time comes, the importance of the company’s certification will be something to think about and certainly is something other minority-owned businesses have to weigh as they plan for the future.

“If you believe it is an asset, then I think you are going to want to try to protect that like you would with any asset,” he said.

Larsen said the best thing for a certified minority-owned business to do is to start planning for the future early.

“To the extent that minority-owned status is important to the customer, develop relationships with other minority-owned entities that might be interested (in buying the business) down the road,” Larsen said.

“I think it takes more foresight and planning when you deal with the risk of loss of a customer.”

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