The SBA’s regulations regarding affiliation between companies controlled by close family members would be clarified under a proposed rule introduced on December 29.
Under the SBA’s current affiliation regulations, companies controlled by family members may be presumed to be affiliated, but the regulation leaves it to the SBA Office of Hearings and Appeals to determine how close the family relationship must be for the presumption to apply. The proposed rule would clarify exactly when the presumption applies.
A small business was affiliated with companies owned by the business owner’s father and siblings, based on the family relationship and the companies’ ongoing history of doing business together.
In a recent size appeal decision, the SBA Office of Hearings and Appeals held that the small business had not successfully rebutted the regulatory presumption that companies owned by close family members are affiliated, because the small business had earned substantial revenues from the alleged affiliates, and intended to issue a subcontract to both affiliates with respect to the procurement at issue.
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.
Can an SBA 8(a) program mentor and protege be affiliated, notwithstanding their 8(a) mentor-protege arrangement, if the firms engage in extensive employee sharing?
In a recent decision, the SBA Office of Hearings and Appeals suggested that extensive employee sharing between an 8(a) protege and its mentor might be outside the bounds of protected “assistance” under the 8(a) mentor-protege program. And in the same case, SBA OHA raised an interesting question: does a mentor-protege relationship protect the mentor from affiliation, as well as the protege?
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.
The SBA Office of Hearings and Appeals will reject a contractor’s attempt to submit new evidence in a SBA size appeal unless the contractor shows “good cause” to admit the new evidence.
And, as demonstrated by a recent SBA OHA size appeal decision, when the evidence was publicly available at the time the size protest was filed, but was not submitted with the size protest, it will be very difficult to convince SBA OHA to review the new evidence.
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.