A small business was affiliated with companies owned by the business owner’s father and siblings, based on the family relationship and the companies’ ongoing history of doing business together.
In a recent size appeal decision, the SBA Office of Hearings and Appeals held that the small business had not successfully rebutted the regulatory presumption that companies owned by close family members are affiliated, because the small business had earned substantial revenues from the alleged affiliates, and intended to issue a subcontract to both affiliates with respect to the procurement at issue.
SBA OHA’s decision in Size Appeal of Industrial Support Service, LLC, SBA No. SIZ-5576 (2014) involved an Army Corps of Engineers solicitation seeking a contractor to provide certain repair work. The solicitation was issued as a small business set-aside under NAICS code 238290 (Other Building Equipment Contractors).
After evaluating competitive proposals, the Corps announced that Industrial Support Service, LLC had been selected for award. An unsuccessful competitor then filed a size protest, contending that ISS was affiliated with K&N Electric Motors, Inc. (K&N) and Intermountain Electric, Inc. (IME).
The SBA Area Office found that John Schmidkofer was ISS’s sole owner, and owned no interest in K&N or IME. However, K&N and IME were owned by Mr. Schmidkofer’s father and siblings.
The SBA Area Office noted that under the SBA’s affiliation regulations, there is a presumption of affiliation between companies controlled by close family members. Although the presumption can be rebutted by showing that there is a minimal, or no, business relationship between the alleged affiliates, the SBA Area Office found that ISS had not rebutted the presumption.
In this regard, the SBA Area Office determined that ISS’s sales to K&N represented 89%, 44%, and 34%, respectively, of ISS’s revenues between 2011 and 2013. Additionally, ISS planned to subcontract 31% of the Corps contract to K&N, and an additional portion to IME. The SBA Area Office issued a size determination finding ISS to be affiliated with K&N and IME, causing ISS to be ineligible for the Corps contract.
ISS filed a SBA size appeal. ISS argued that it was in a different line of business than K&N and IME, and that ISS and its alleged affiliates did not share facilities, had no common ownership, and no common control. ISS pointed out that it had never before used K&N as a subcontractor on a government procurement, and did not receive any financial assistance from K&N or IME. In sum, ISS contended, the totality of the circumstances did not support the SBA Area Office’s size determination.
SBA OHA wrote that it has long interpreted the SBA’s affiliation regulations “as creating a rebuttable presumption that family members have identical interests and must be treated as one person.” OHA wrote that the presumption of affiliation can be rebutted by showing that the family members “have no business relationship or involvement with each other’s business concerns,” and that “a minimal amount of business or economic activity between two concerns does not prevent a finding of clear fracture.”
SBA OHA noted that K&N was responsible for a substantial portion of ISS’s sales over the years 2011-2013 and that ISS would be subcontracting a significant portion of the Corps contract to K&N. “Based on these facts,” SBA OHA wrote, “the Area Office could reasonably determine [ISS] had not shown a clear line of fracture existed between itself and K&N.” SBA OHA wrote that ISS “failed to show that there was no considerable business involvement between [ISS] and K&N.” In fact, “[t]his relationship continues to exist today based on the 31% of the work K&N is scheduled to subcontract for the instant procurement.” SBA OHA upheld the SBA Area Office’s finding of affiliation between ISS and K&N.
SBA OHA noted that the sizes of ISS and K&N, combined, exceeded the $14 million size standard under NAICS code 239290. Accordingly, SBA OHA wrote, it was not necessary to determine whether the SBA Area Office erred by finding ISS to be affiliated with IME. SBA OHA denied ISS’s size appeal.
Often, business owners are very surprised to learn that their small businesses are presumed affiliated with companies controlled by close family members. The presumption of affiliation can be rebutted, but as the Industrial Support Service case demonstrates, a close family relationship coupled with significant business ties will likely result in a finding of affiliation.