On Monday, June 24, SBA will issue its long-awaited proposed rule implementing the Small Business Runway Extension Act. We intend to explore the proposed rule and the accompanying commentary more fully over the next few days (as we have been doing over the past few months), but we wanted to provide a quick update to our readers on the main changes in the proposed rule.
The key takeaway is that, once the rule is in place, SBA size standards will be based on a 5-year average. SBA “proposes to change its regulations on the calculation of annual average receipts for all receipts-based SBA size standards and other agencies’ proposed size standards for service-industry firms from a 3-year averaging period to a 5-year averaging period.”
In the proposed rule, SBA recognizes nuanced distinctions in the Small Business Act between which allow agencies other than the SBA to adopt their own size standards. These agency-specific standards, however, require an agency to “obtain approval from the SBA’s Administrator for adopting its own size standard.” This provision “permits any agency to use a 3-year average outside of the service industries[.]” However, “SBA proposes to adopt a 5-year averaging period for calculating annual receipts of businesses for all industries that are subject to receipts-based size standards, including the retail trade, agricultural, and construction industries.”
The calculation methodology for determining average annual receipts in 13 C.F.R. § 121.104 will stay the same, but use a 5-year standard rather than a 3-year standard. The proposed rule states:
(c) Period of measurement.
(1) Annual receipts of a concern that has been in business for 5 or more completed fiscal years means the total receipts of the concern over its most recently completed 5 fiscal years divided by 5.
(2) Annual receipts of a concern which has been in business for less than 5 complete fiscal years means the total receipts for the period the concern has been in business divided by the number of weeks in business, multiplied by 52.
(3) Where a concern has been in business 5 or more complete fiscal years but has a short year as one of the years within its period of measurement, annual receipts means the total receipts for the short year and the 4 full fiscal years divided by the total number of weeks in the short year and the 4 full fiscal years, multiplied by 52.
In the rule, SBA proposed treating service industries and other non-service-industry firms subject to receipts-based size standards the same. While SBA believes section 2(a)(2)(C) of the Small Business Act allows for different treatment of these two subsets of firms, “separating out service-industry firms would cause confusion and create a greater compliance burden on firms that participate in both services and non-services industries . . . with receipts-based size standards.”
We’ll provide additional analysis of this proposed rule soon, and we’ll follow any updates from the SBA. Be sure to read the full proposed rule once it is published and provide any comments to the SBA.
[Editor’s Note: thanks to Rob Kampen for helping to draft this post]