Effective January 16, 2025, the Small Business Administration (SBA) issued a final rule intended to close what SBA considered to be a long-standing loophole in its size recertification rules that allowed a large business to acquire a small business and then compete against other small businesses for task orders. While the final rule makes significant changes across a variety of small business programs, this alert follows up on our previous article regarding notable changes to size recertifications and the potential impact on contractors considering a sale, acquisition, or merger.
The new rule consolidates the small business program-specific size and recertification requirements into a newly created section—13 C.F.R. § 125.12—and creates three exceptions to the general rule that an offeror’s size status is determined at the time of initial offer including price:
- Small business concerns must recertify their size and small business program status within 30 calendar days of a merger, acquisition, or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest. Both the acquiring and acquired concerns must recertify if each concern has received an award as a small business or is a small business program participant. For joint ventures, any partner to the joint venture that has merged or is party to the sale or acquisition must recertify its size and status.
- For contracts and orders lasting more than five years (including options), such as multiple award contracts (MAC), a concern must recertify its size and status within 120 days prior to the end of the fifth year of the award, and no more than 120 pays prior to exercising any additional options.
- An offeror must recertify its size and/or status upon request by the contracting officer in response to a solicitation for a set-aside or reserved order or agreement.
Prior to the final rule, concerns remained eligible for task orders and options even if they recertified as other than small following an acquisition or after more than five years on a long-term contract. This allowed large businesses to acquire small businesses holding valuable set-aside, multiple-award IDIQ contracts and then continue to compete against other small businesses for task orders, even though the concern was no longer small. The final rule closes this perceived loophole for “disqualifying recertifications” on MACs triggered by a sale, acquisition, or merger involving a large business, or if a concern is no longer small after five years or before additional options on long-term contracts. This portion of the rule, however, is not effective until January 17, 2026.
A disqualifying recertification effects eligibility, depending on the type of contract, the type of buyer or party to a transaction, and the type of recertification:
- For single award set-aside contracts, a concern remains eligible to receive task orders and options after a disqualifying recertification. SBA is allowing a large business to acquire a small business with a single-award IDIQ contract and to continue to receive task orders and options, because there would be no competition with other small businesses for task orders.
- For set-aside MACs, disqualifying recertification caused by a long-term contract recertification renders the concern ineligible to receive task orders and options.
- For set-aside MACs, a disqualifying recertification due to a merger, acquisition, or sale involving an other than small business renders the concern ineligible for task orders and options exercised under the MAC. However, if all parties to the transaction are individually small, the concern remains eligible for task orders and options, even though the surviving entity is no longer small. This is the first time SBA has considered the size of the buyer or other parties to a transaction. Even though a concern would no longer be small after an acquisition, SBA determined that the concern should continue to remain eligible for task orders since the buyer is also small. This underscores that SBA is specifically targeting M&A activity by existing large businesses.
While the above recertification rules are delayed one year, SBA changed the rules regarding the effect of a disqualifying recertification caused by an M&A deal on pending proposals and made them effective on January 16, 2025.
These most recent changes are in addition to the relatively recent 180-day rule, which requires a concern to recertify its size and status for set-aside or reserved awards if a merger, sale, or acquisition occurs after offer submission but prior to award. In this regard, a disqualifying recertification may affect a concern’s eligibility for pending awards as follows:
- If the merger, sale, or acquisition occurs within 180 days of offer submission but prior to award, a disqualifying recertification renders the concern ineligible for award.
- If the merger, sale, or acquisition occurs after 180 days of offer submission but prior to award, a concern with a disqualifying recertification remains eligible for a single award contract.
- If the merger, sale, or acquisition occurs after 180 days of offer submission but prior to award, a disqualifying recertification renders the concern ineligible for a multiple award contract.
Given all of the changes in recent years, prospective buyers, sellers, or investors in government contractors should carefully consult SBA’s complex new rules. The value of many small business acquisition targets are frequently tied to their set-aside long-term MACs and the assumption that the concern would remain eligible for task orders and options even after the transaction. However, these MACs may have limited or no value to a large business after January 17, 2026, which will likely impact the purchase price for small businesses. In addition to increased M&A activity before significant portions of the new rule take effect, we anticipate that SBA’s new rule will make prospective buyers who are still small based on their multi-year average, but have grown large enough in recent years to have sufficient capital, the ideal suitor for small business owners looking for an exit.
There is no question that these rules are intricate, have far-reaching impacts on small business contractors, and still leave some ambiguity and practical complications. Venable will continue to monitor these rules and their application. Should you have questions, please contact the authors of this article or any lawyers in Venable’s Government Contracts Group.