Affiliation based on family relationships is perhaps one of the least understood SBA affiliation rules, and continues to trip up many small government contractors.  Case in point: a recent SBA Office of Hearings and Appeals decision finding a small business affiliated with a company controlled by the mother of the small business’s owner, based on the family relationship and subcontracts between the companies.

SBA OHA’s decision in Size Appeal of Alleo Corporation, SBA No. SIZ-5405 (2012) involved an Air Force small business set-aside solicitation for medical support services.  Alleo Corporation submitted an offer, self-certifying as a small business.  The contracting officer subsequently filed a size protest with the SBA, questioning whether Alleo was affiliated with DP Technologies Services, Inc., or DPTS.

The SBA Area Office determined that Alleo and DPTS were affiliated.  The SBA Area Office explained that Alleo was controlled by Alan Portillo, its President and sole shareholder.  Mr. Portillo’s mother, Darla Portillo, was the President and sole shareholder of DPTS.  Accordingly, under the SBA’s identity of interest affiliation rule, the two companies were presumed affiliated on the basis of the close family relationship, and could only rebut the finding by showing a “clear fracture” between the firms.

The SBA Area Office noted that Alleo had proposed DPTS as a major subcontractor, expected to perform 45% of the Air Force contract.  In addition, Alleo had received 100% of its revenues from DPTS over the past year and a half.  Based on this information, the SBA Area Office found that no clear fracture existed and issued a size determination stating that Alleo and DPTS were affiliated.

Alleo filed a size appeal with SBA OHA, challenging the SBA Area Office’s decision.  Alleo argued that it did not share facilities, equipment or employees with DPTS, nor was DPTS the only subcontractor for the Air Force contract.  Alleo also argued that the SBA Area Office had improperly found Alleo economically dependent upon DPTS because, as a start-up, Alleo had not had time to develop a broader base of customers.

SBA OHA rejected Alleo’s arguments.  It wrote that when two firms are controlled by close family members, the companies cannot demonstrate a clear fracture unless no more than “minimal” business or economic ties exist between the firm.  Here, there were “numerous” business or economic ties between Alleo and DPTS, including DPTS’s major subcontracting role on the contract.  SBA OHA explained, “the mere fact that [Alleo] and DPTS do not share facilities, equipment, or employees cannot overcome the strong continuing economic ties between the two firms.”

SBA OHA also disagreed with Alleo’s contention regarding economic dependence.  Although the SBA Area Office had, in fact, noted that Alleo relied upon DPTS for 100% of its revenue, the SBA Area Office had not found affiliation on that basis.  “Rather, the Area Office found [Alleo] affiliated with DPTS upon the identity of interest due to the family relationship between Mr. Portillo and Ms. Portillo.”  In this context, the SBA Area Office used the economic ties between the companies as an indication of a lack of clear fracture, not to prove affiliation on the independent basis of economic dependence.  SBA OHA denied Alleo’s size appeal.

The Alleo Corporation SBA OHA size appeal decision should serve as a cautionary tale to any small government contractor considering doing business with a company controlled by a close family member.  If affiliation with that company would lead to a size eligibility problem, anything more than minimal contractual or economic ties between the companies could be fatal.  In other words, you may want to think twice before subcontracting to Mom.