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SBA Issues Significant “Clarification” of Rules Concerning Small Business Eligibility Following an Acquisition

May 22, 2018

WHAT: The U.S. Small Business Administration recently issued a Direct Final Rule that purports to make mere “technical changes” to its regulations, but which will in fact have a significant impact on some contractors. The rule upends the generally accepted interpretation of the SBA’s recertification rules for multiple-award contracts—i.e., after a small business is acquired by a large business, the company is still eligible to compete for set-aside orders unless the Contracting Officer specifically requests recertification for a particular order. In the final rule, SBA has amended its regulations to provide that where a company becomes “other than small” or no longer has a certain socio-economic status (veteran-owned, woman-owned, HUBZone, etc.) as a result of a novation, merger, acquisition, or negative status determination, the concern is ineligible to compete for set-aside task orders on multiple-award contracts held by the company, even absent a specific request for recertification by the Contracting Officer.

WHEN: The final rule was issued on March 26, 2018; it becomes effective on May 25, 2018. The rule will apply to all new solicitations issued after that date. Because SBA asserts that this change is merely a clarifying technical change, it is an open question whether the rule will be applied to existing multiple-award contracts. That issue will likely be resolved through future size protests. A prior decision issued by the SBA Office of Hearings and Appeals (OHA) found that SBA’s existing regulations permit an acquired small business to retain its eligibility for future orders. It remains to be seen whether OHA will revisit its decision following this “clarification” by SBA.

WHAT DOES IT MEAN FOR INDUSTRY: This change will have a significant impact on the valuation of small businesses that have multiple-award set-aside contracts. Previously, because of the ambiguity in the SBA’s regulations, companies that were acquired and lost their small business and socio-economic status have generally been permitted to continue competing for set-aside task and delivery orders under multiple-award contracts. This was based on the general rule that, if the firm qualified as small when the contract was awarded, it maintained that status for the life of the contract unless the Contracting Officer specifically requested recertification for a particular order. Now, in light of this new rule, once a company notifies the agency of its changed status following an acquisition, the company will no longer be eligible to receive new set-aside orders under a covered contract.