Many small business clients of mine have been approached by or considered acquisition by a larger firm. Well, if this sort of sale or merger would turn a small business into a large business, the small business should pay close attention to a little-publicized change stemming from SBA’s Mentor-Protégé Consolidation rule that came out last fall. The new rule could result in a company losing out on an otherwise successful bid.

It’s fairly common for a small business to be purchased by a larger business. But what is the effect of such an acquisition on the small business?

Well, the basic rule is that size is determined at the offer date. As SBA put it in the recent rule: “If a concern grows to be other than small between the date of offer and the date of award (e.g., another fiscal year ended and the revenues for that just completed fiscal year render the concern other than small), it remains small for the award and performance of that contract.” That would make sense because generally “SBA determines the size status of a concern, including its affiliates, as of . . . its initial offer or response which includes price.” 13 CFR § 121.404(a).

However, there is now an exception if the small business is part of a merger, sale, or acquisition that makes the company no longer small. As a typical example, consider a small business that is acquired by a business that is large for the NAICS code assigned to the solicitation. Under the new rule, the small business would have to recertify its size, and could possibly lose the award depending on the timing of the acquisition. So, small businesses must pay close attention to this new timing rule.

SBA justified the rule by stating that “recertification should be required when it occurs close in time to a concern’s offer, but agrees that it would not be beneficial to discourage legitimate business transactions that arise months after an offer is submitted.”

Here is the language from the new rule, now found at 13 CFR § 121.404(g). The new rule provides:

If the merger, sale or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award. If the merger, sale or acquisition (including agreements in principal) occurs within 180 days of the date of an offer and the offeror is unable to recertify as small, it will not be eligible as a small business to receive the award of the contract. If the merger, sale or acquisition (including agreements in principal) occurs more than 180 days after the date of an offer, award can be made, but it will not count as an award to small business.

Note that the new rule requires recertification in every case where the merger, sale, or acquisition occurs after offer but prior to award. So, a recertification will be required if award has not been made yet. But a small business could lose the award if the transaction occurred before the 180-day mark. Small businesses must be very careful in reviewing the timing for an acquisition or merger if the business has submitted pending offers for federal solicitations.

In addition, remember that the present effect rule means that SBA will consider an acquisition or merger to have occurred when there is an agreement in principle, in some cases even if the final agreement has not been signed. Combining this new 180-day recertification rule and the present effect rule means companies need to be extra careful when considering an acquisition or merger.

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