SBA Affiliation Rules and Family Matters: OHA OK’s Minor Business Dealings

When it comes to the SBA affiliation rules, it’s a good idea to keep Steve Urkel in mind.  Why remember this lovable suspender-wearing nerd?  Well, because in the SBA affiliation world, “family matters.”

Okay, bad joke.  But hold the rotten tomatoes, because I have a point here.  In my experience, one of the most common ways small businesses find themselves with an SBA affiliation problem is through family relationships.  Many small government contractors are surprised to learn that the SBA presumes that firms controlled by close family members are affiliated due to a supposed “identity of interest” between the family members.  For example, if you control Company A and your spouse controls Company B, the two firms are presumed affiliated for SBA size purposes, and you must rebut the presumption (not an easy task) to avoid affiliation.

In some prior size appeal cases, the SBA Office of Hearings and Appeals held that two firms controlled by family members could not rebut the presumption if the companies had any business dealings whatsoever.  However, in a commonsense decision—albeit one creating a bit of a gray area—SBA OHA recently held that two companies controlled by family members are not necessarily affiliated just because they have minor business relations.

SBA OHA’s decision in Size Appeal of GPA Technologies, Inc., SBA No. SIZ-5307 (2011) involved a size protest against GPA Technologies, one of the awardees of a multiple-award IDIQ Contract.  The SBA Area Office concluded that GPA was affiliated with Santa Barbara Applied Research, Inc. (SBAR) because SBAR was controlled by the sister of GPA Technologies’ sole owner and president.

The SBA Area Office noted that there was no common ownership or management between the firms, nor were there extensive contractual relationships.  The firms did not share facilities and worked in different primary industries.  However, GPA Technologies had previously subcontracted small portions of its work to SBAR, amounting to between 4% and 4.5% of SBAR’s revenues.  In addition, the firms had an ongoing consulting agreement, under which a SBA employee would perform 10 to 20 hours per work each month for GPA Technologies.  Based on these relationships between the companies, the SBA Area Office held that GPA Technologies had not rebutted the presumption of affiliation and was affiliated with SBAR.

GPA Technologies appealed to SBA OHA.  The question at issue in the size appeal, as SBA OHA wrote at the outset of its opinion, is “how much separation between the businesses of family members constitutes a clear fracture” necessary to rebut the presumption of affiliation.  SBA OHA noted that its own prior size appeal decisions were inconsistent: some more recent decisions stated that the presumption could not be rebutted unless the companies had no business dealings at all, while other cases indicated that some minor business involvement was acceptable.

SBA OHA held that this second group of cases, allowing minimal contractual involvement, was the better view.  SBA OHA agreed with GPA Technologies that “a small amount of economic activity is not sufficient to create a commonality of interests to make the firms act in concert or as one,” which is the underlying premise of the “identity of interest” SBA affiliation rule.  SBA OHA concluded that the presumption of affiliation between businesses owned by family members can be rebutted “despite some minimal business involvement.”  SBA OHA granted GPA Technologies’ size appeal and reversed the decision finding the company affiliated with SBAR.

SBA OHA’s size appeal decision in GPA Technologies was the right one.  When two companies happen to be controlled by family members, those companies should not be completely precluded from doing any sort of business with one another in order to avoid affiliation.  After all, as SBA OHA wrote, minor business involvement simply does not suggest that the two companies will act in concert, especially when there is no common ownership, management or other high-level ties between the firms.

However, though SBA OHA got it right, it made the affiliation waters a little murkier.  “Thou shalt not do business with companies controlled by thy close relatives,” the commandment adopted in some prior SBA OHA size appeal decisions, is easy to understand and follow.  Under GPA Technologies, it is clear that you can do some level of business with a company controlled by a close relative, but how much is uncertain.  Would the SBA OHA decision have been different if the companies’ subcontracts had been eight percent of SBAR’s revenues?  Ten?  What if the consulting agreement was significantly larger or other ties existed between the companies?  Questions like these now await future SBA OHA decisions for resolution.

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