Asset Purchases and SBA Affiliation: Buyer Beware

If your small business is thinking about acquiring all or most of another company by way of an asset purchase agreement, you may wonder what effect it will have on your small business size status.  Yes, your company will be bigger now that it used to be, and will have to take that into account going forward.  But you may not be aware that an asset purchase agreement could create an affiliation problem and affect your size status looking backward, too.

The decision of the SBA’s Office of Hearings and Appeals in Mark Dunning Industries, Inc., SBA No. SIZ-5284 (2011), demonstrates how this rule works.  That size appeal involved a company called The CFS Group, Inc., which acquired substantially all of the assets of Richmond Waste Services (“RWS”) in 2008.   In 2011, CFS was awarded an Army small business set-aside procurement.  A competitor filed a size protest with the SBA, alleging that CFS was affiliated with a number of entities, including RWS.

Citing a special SBA affiliation regulation, SBA OHA held that CFS was affiliated with RWS because CFS had acquired substantially all of RWS’s assets before the date it self-certified as small.  For this reason, in determining CFS’s size, the SBA was required to include RWS’s annual receipts for 2008, 2009 and 2010—including those parts of 2008 before CFS purchased RWS.

As SBA OHA’s decision in Mark Dunning Industries demonstrates, purchasing the assets of another company could have significant implications on a small business’s size status.  Before signing on the dotted line, do your due diligence, and figure out whether the asset purchase agreement could create an affiliation problem.

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