If you’re a small business owner in the government contracting (GovCon) space, recent updates from the Small Business Administration (SBA) could significantly affect your plans if you are considering a sale, merger, or acquisition. The SBA changes are important, complex and will have a major impact on valuations.
What is Size and Status Recertification?
Size and status recertification is a process where a business reaffirms its eligibility as a small business or as a participant in specific SBA programs (e.g., 8(a), HUBZone, Women-Owned Small Business (WOSB), or Service-Disabled Veteran-Owned Small Business (SDVOSB)). Recertification typically comes into play when significant changes, such as mergers, sales, or acquisitions, occur. These changes can impact whether a company still qualifies as a small business and the implication when recertification is not possible.
Key Updates in the SBA Rule
The new SBA rule consolidates size and status recertification requirements into one section (§125.12), streamlining what was previously scattered across multiple regulations. Here are the highlights:
Clarified Rules for Contract Continuation:
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- If your business recertifies as no longer meeting size or program status requirements during an ongoing contract, you can still perform that contract for its current period of performance.
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- For future awards or orders under the same contract, your eligibility depends on whether the contract is single-award or multiple-award:
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- Single-Award Contracts: You remain eligible for options and future orders, but the agency cannot count these awards as meeting small business goals.
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- Multiple-Award Contracts: You are ineligible for small business set-asides or reserved orders but may still receive unrestricted orders.
Impact on Mergers, Sales, and Acquisitions:
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- If a merger, sale, or acquisition occurs after you’ve submitted an offer but before the award, your eligibility depends on timing:
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- Within 180 Days of Offer Submission: You become ineligible for the award.
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- After 180 Days: You remain eligible.
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- If your recertification disqualifies you due to a sale to a large business, you’ll lose eligibility for small business set-asides and options on long-term contracts after one year from the rule’s effective date.
Flexibility for Small-to-Small Transactions:
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- If two small businesses merge, the surviving entity may retain eligibility for orders under an existing small business multiple-award contract. However, agencies cannot count these awards toward their small business goals.
Grace Period for Adjustment:
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- Businesses will have one year from the rule’s effective date to adjust to these changes. For contracts already in place, companies with disqualifying recertifications remain eligible for orders and options during this period, but these will not count as small business awards for government reporting purposes.
No Retroactive Application:
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- The new rules will not apply retroactively. They take effect 30 days after publication, and provisions around disqualifying recertifications apply only to those occurring after the one-year grace period.
What This Means for GovCon Business Owners
Prepare for M&A Implications:
- If you’re considering selling your business, understand how the timing of a sale might affect your eligibility for small business contracts. A sale to a large business could limit your ability to win future set-asides.
- Buyers and sellers need to be mindful of the 180-day rule and the one-year grace period when structuring deals.
Monitor Long-Term Contracts:
- For businesses holding long-term small business contracts, these changes emphasize the importance of recertification timing. Losing small business status could make you ineligible for future options or orders.
Opportunities for Small-to-Small Transactions:
- If merging with or acquiring another small business, the combined entity can continue benefiting from certain contracts. This may be an attractive strategy for growth without immediately losing small business designations.
Impact on Valuation:
- Buyers and sellers should consider how these rule changes might influence business valuations. Losing eligibility for small business set-asides could reduce future revenue opportunities, impacting acquisition pricing.
Final Thoughts
These changes bring much-needed clarity to size and status recertification, but they also introduce complexities that small business owners must navigate carefully. Whether you’re planning to sell your business, merge with another company, or maintain your status as a small business, proactive planning and strategic adjustments will be key.
At sbLiftOff, we specialize in helping GovCon small business owners prepare for M&A transactions, ensuring compliance with SBA rules while maximizing value. If you’re considering a sale or acquisition, contact us to learn how we can guide you through the process.
