Acquiring a Disadvantaged Business Enterprise (DBE) does not transfer its DBE certification automatically. Under the U.S. Department of Transportation’s DBE rules in 49 CFR Part 26, the company remains eligible only if, after the deal, one or more socially and economically disadvantaged owners (SEDOs) own at least 51% of it, contributed real capital for that ownership, and actually control the business, and the change must be reported to the certifying agency within 30 days. Because DOT significantly changed how disadvantage is determined in 2025, buyers should also confirm that the target’s certification has survived reevaluation under the current rules.
DBE certification can be valuable for companies that bid on federally assisted transportation contracts. That value can disappear if an acquisition is structured without the certification rules in mind. Below are the main issues to address before signing.
The Regulatory Landscape Has Changed
The DBE program has been in flux. DOT issued a comprehensive update to Part 26 in 2024 that, among other things, adjusted personal net worth limits and revised certification and control rules. In 2025, following litigation challenging the program’s race- and sex-based presumptions of disadvantage, DOT issued an interim final rule removing those presumptions. Under the current approach, owners generally must establish social and economic disadvantage through an individualized showing, and existing DBEs were required to be reevaluated by their certifying agencies.
These developments may continue to change through further rulemaking or litigation. A buyer should confirm the target’s current certification status, whether it has completed any required reevaluation, and how the program’s rules apply on the closing date.
1. Ownership and Source of Funds
A DBE must be at least 51% owned by one or more individuals who qualify as socially and economically disadvantaged, and their ownership must be real, substantial and continuing, not a formality. Key points for an acquisition:
- Capital contribution. The SEDO’s ownership should reflect a genuine contribution of capital or experience with a real risk of loss. Ownership acquired with funds provided or backed by non-disadvantaged participants receives close scrutiny.
- Proportionate benefits and burdens. Profits, losses, risks and distributions should track ownership. Side arrangements that shift economics to a non-disadvantaged investor can defeat eligibility.
- Financing terms. Debt financing may be possible, but loan terms, credit support and security interests should not give a lender or minority investor effective ownership or control.
- Economic disadvantage. The SEDO must also meet the program’s personal net worth limits and other economic disadvantage criteria.
If the buyer is not itself a SEDO, the certification analysis becomes much harder, and in many cases the company will not remain eligible after the deal.
2. Control and Governance
Certifying agencies look at both the governing documents and how the company actually operates. Generally, the SEDO should:
- Be the ultimate decision maker. The SEDO typically holds the highest officer position and controls the board, through a majority of seats or a tie-breaking vote. Supermajority provisions, voting agreements or veto rights that let a non-disadvantaged party block ordinary decisions can be disqualifying, and any such arrangements must be disclosed.
- Have relevant knowledge and experience. The SEDO must be able to run the business, not serve as a figurehead. Reviewers may compare the SEDO’s experience with that of others in the company.
- Exercise independent judgment. The SEDO may delegate day-to-day functions to managers and employees, as any executive would, but must retain the power to control and revoke that delegation and must actually make key decisions.
The company must also operate as an independent business. Heavy reliance on a non-DBE partner for equipment, personnel, financing, facilities or bonding can lead a reviewer to conclude the DBE is not truly independent. These issues should be addressed in the shareholder or operating agreement and in any services, lease or equipment arrangements with the buyer’s affiliates.
3. Notice and Recertification
After closing, the DBE must notify its certifying agency, usually the state’s Unified Certification Program, of material changes affecting eligibility within 30 days. In California, the California Unified Certification Program handles DBE certification. Expect the agency to review the new ownership and control structure, which may include:
- Requests for the purchase agreement, governing documents, financing agreements, leases and payroll records.
- Interviews with the SEDO and key personnel.
- On-site visits to the office and active job sites.
- Review of resumes, licenses and equipment ownership.
Each year, the DBE must also submit a declaration of continued eligibility. If the agency determines the company no longer qualifies, it can begin proceedings to remove certification, which can affect the company’s ability to count toward DBE goals on pending and future contracts.
4. Due Diligence on the Target
Beyond standard M&A due diligence, buyers of a DBE should review:
- The certification file, recent correspondence with the certifying agency, and the status of any reevaluation.
- Contracts on which the company’s DBE participation is counted, and how prime contractors and agencies will treat a change in status.
- Any history of complaints, investigations or questions about commercially useful function on past projects.
- Bonding, licensing and equipment arrangements that may change after closing.
The purchase agreement should allocate the risk of losing certification, for example through closing conditions, representations about certification status, and price adjustments or indemnities tied to decertification.
5. False Statements Carry Serious Risk
Misrepresenting ownership, control or independence to obtain or keep DBE status can lead to decertification, suspension or debarment, and civil or criminal liability, including under the federal False Claims Act. Structures designed to make a non-disadvantaged party’s business look like a DBE are a frequent enforcement target.
The Takeaway
A DBE acquisition is part M&A transaction and part regulatory eligibility exercise. Confirm the target’s current status under the latest DOT rules, structure ownership and funding so the SEDO has real capital at risk, build governance documents that give the SEDO actual control, and plan for the 30-day notice and recertification review.
Frequently Asked Questions
Does DBE certification transfer when a company is sold?
Not automatically. The certifying agency must be notified of the change within 30 days and will evaluate whether the company still meets ownership, control and disadvantage requirements under the new ownership.
Can a non-disadvantaged investor help finance a DBE acquisition?
Possibly, but the arrangement will be scrutinized. The disadvantaged owner must hold at least 51% with real capital at risk and must control the company, and benefits and burdens should be proportionate to ownership.
What changed in the DBE program in 2025?
DOT issued an interim final rule removing the presumption that members of certain racial and ethnic groups and women are socially and economically disadvantaged. Owners generally must now show disadvantage individually, and existing DBEs were subject to reevaluation.
Who certifies DBEs in California?
DBE certification in California is handled through the California Unified Certification Program, made up of participating transportation agencies. Certification is generally recognized by recipients statewide.
How Sutter Law Can Help
Sutter Law advises buyers and sellers on acquisitions, including deal structure, governance documents and purchase agreement terms that take regulatory eligibility into account, and can coordinate with certification counsel during the review process. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
