SBA Releases Recertification Regulations
by Gregg Funkhouser, CPA, Goodman & Company, LLP
SBA Small Business Size Status
The new regulations address the issue of small business size status. Historically, when a firm submitted their initial price offer on a solicitation, that was the date used to determine the company's size for small business status. In addition, the small business status would remain in effect for the life of the contract including option years.
Federal agencies are required by law to meet small business goals established by the Small Business Administration. Therefore, it was possible for a company to qualify as small business at the initial price offer but outgrow their small business status through growth or by merger or acquisition. Meanwhile, Federal Agencies were still claiming to meet their small business goals by counting these contracts as small business.
New Recertification Regulations
The SBA started to look into the regulations in response to inquiries regarding the status of small business which have been acquired or merged into large companies. It did not seem appropriate that contracts purchased by large corporations should continue to count as small business contracts against an agency's small business goals. In response to these public comments, SBA issued the new recertification regulations.
The new regulations effect long term contracts in excess of five years. SBA now requires recertification of a company's size status before commencement of the sixth year of a contract. This includes before granting options which would extend any contract beyond five years. If a company does not meet the small business size requirements, it does not mean the agency must rescind the contract; it simply means that it may not include the remainder of the contract in meeting the agency's small business goals. The new regulations go into effect June 30, 2007.
Contractors sell their company's in a variety of ways including asset sales, stock sales or mergers. Asset sales (sales of contracts) require novation of the contract from one business to another. Sales of stock or a merger only change the name of the entity, the rights and obligations (contracts) are not effected. Contracts novated or company's which are purchased or merged after December 21, 2004, must also go through the recertification purchase. Therefore, the recent rollups of many small businesses by larger corporations will no longer be counted in the agency's small business goals.
Contracts affected include all government agency contracts, including GSA and GWAC contracts. The legislation also includes provisions for size standard protests
The goals of the new regulations can be found on SBA's website www.sba.gov where they have a question and answer section on the new regulations. They state that the new regulations are designed "to better ensure that federal agencies receive credit for making contract awards to small businesses on long term-contracts so long as the firms that receive such contracts remain, in fact, small. This will make federal contract reporting more accurate. More importantly, it will increase the opportunities for small businesses."
Who Wins and Who Loses?
The clear winners with these new regulations are the small and emerging businesses. Agencies will be forced to contract with small business as their contract goals with SBA fall short. As mergers and acquisitions continue in the industry, less contracts are going to be certified as small business. Also, extending graduating 8(a) or other small businesses with long term "graduation presents" will no longer be guaranteed to count as small business as was the case with the original regulations.
The regulations will not be welcome by business owners who have graduated small business or are in a position to sell their small business (or large business with small business qualified contracts). I was on a panel recently discussing current government contracting issues with business owners. One topic was the recent recertification rules. The CEO of a larger company was commenting on how his customers were upset that many on the contracts they had acquired from small businesses would no longer qualify in meeting SBA's goals. In addition, the CEO commented that the price they would be willing to pay for small businesses would now decrease since the ability to keep those contacts and their option years was now less of a certainty. This will obviously affect the value of many small businesses positioned for sale.
In summary, SBA has issued regulations to help ensure that small business contracts go to small businesses. They have put the burden on the federal agencies to monitor their small business goals. The regulations will effectively devalue the sale of existing small businesses or the novation of small business contracts. However, it will increase the number of contracts to small and emerging businesses.
Gregg has practiced in private industry and as a certified public accountant for over twenty years. As partner-in-charge of the Goodman & Company Government Contractor Services Group, he has extensive knowledge in compliance, tax and accounting issues facing government contractors.
In addition, Gregg has authored numerous articles on government contracting, SBA, tax and compliance issues. Under his direction, the firm publishes a newsletter, “Government Contracting Today,” which addresses issues and economic trends affecting the government contracting industry.
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