The SBA affiliation rules are not always intuitive, and perhaps no SBA affiliation rule is as little understood as the so-called “identity of interest” rule under 13 C.F.R. 121.103(f).
Identity of interest affiliation can arise in several ways, including when close family members also have business ties. As demonstrated in a recent SBA Office of Hearings and Appeals decision, a close family relationship between two business owners, plus significant business ties, may cause affiliation between the businesses.
SBA OHA’s decision in Size Appeal of Knight Networking & Web Design, Inc., SBA No. SIZ-5561 (2014) involved a Navy procurement for ship and shore satellite communications support services. The solicitation was issued as a small business set-aside under NAICS code 541330.
After evaluating competitive proposals, the Navy announced that Knight Networking & Web Design, Inc. was one of several awardees. An unsuccessful competitor subsequently filed a size protest, claiming that Knight was affiliated with various other entities.
The SBA Area Office determined that Adrian Matteucci owned 100% of Knight, and controlled Knight through his ownership. Adrian Matteucci’s father, Robert Matteucci, owned 92.5% of the voting stock of four companies, Centurum, Inc., Centurum Technical Systems, Inc., Centurum Information Operations, and Centurum Information Technology Inc. The SBA Area Office determined that Robert Matteuci controlled these four companies (collectively referred to by OHA as “Centurum”) by virtue of his ownership.
The SBA Area Office then applied the identity of interest affiliation rule, which states that companies controlled by close family members–including a parent and child–are presumed to be affiliates. Although the presumption can be rebutted, the companies can only do so by demonstrating a “clear line of fracture” between them.
In Knight’s case, the SBA Area Office noted that contracts from Centurum represented 100% of Knight’s 2010 revenue, 76% of 2011 revenue, and 34% of 2012 revenue. In each of these years, contracts with Centurum comprised the majority of Knight’s contracts. Additionally, Knight planned to subcontract 16% of the Navy contract to one of the Centurum entities. The SBA Area Office determined that no clear line of fracture existed, and found Knight affiliated with all four Centurum companies under the identity of interest affiliation rule.
Knight filed a size appeal with SBA OHA. Knight argued, in part, that it was improper for the SBA Area Office to evaluate revenues from 201o through 2012 because Knight’s proposal had been submitted in June 2013. As of that time, Knight stated, it was “performing only five subcontracts for Centurum” and had decreased its revenues from Centurum to 22.67%. Knight argued that, as of 2013, the business ties between Knight and Centurum were “sufficiently minimal” to demonstrate a clear fracture.
SBA OHA acknowledged that the SBA Area Office had focused on revenues in prior years. “Nevertheless,” OHA wrote, “[Knight] alleges that [Knight] still derived revenues from Centurum, through at least five subcontracts, as of June 13, 2013,” the date of Knight’s size certification. SBA OHA continued, “[o]n this record, then, the Area Office could reasonably find that a clear line of fracture had not been established, as there was substantial and long-standing involvement by Adrian and Robert Matteucci in one another’s business affairs, which continued to exist through the date to determine size.”
SBA OHA wrote that Knight’s “plan to subcontract 16% of the subject procurement to [Centurum] further undermines any finding of clear fracture.” SBA OHA concluded that “the overall business ties” between Knight and Centurum “remain quite extensive,” and that no clear fracture existed. SBA OHA denied Knight’s size appeal.
From a business perspective, it can often make sense to do business with a trusted company owned by a close family member. But as the Knight Networking & Web Design case demonstrates, when companies owned by close family members do business together, they might be putting themselves at risk of affiliation under the SBA’s affiliation rules.