Tag Archives: SBA affiliation rules

SBA OHA: Inter-Affiliate Transactions Exception Does Not Apply to a Division

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SBA Office of Hearings and Appeals cases frequently involve contractors trying to argue that they are not affiliated with other entities.  But in Size Appeal of The Associated Construction Co., SBA No. SIZ-5314 (2011), the contractor at issue attempted to argue the opposite—that it was affiliated with another entity, namely, a division of itself.

This strange case came about because the contractor hoped to take advantage of the so-called “inter-affiliate transaction exception” under 13 C.F.R. § 121.104(a), which allows contractors to deduct “proceeds between a concern and its domestic or foreign affiliates” from its average annual receipts for size purposes.  Unfortunately for the contractor, SBA OHA held that a company cannot be affiliated with its own division—meaning that the exception did not apply.

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The Ostensible Subcontractor Rule and Key Personnel

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According to Executive Order 13,495, follow-on contractors must offer a “right of first refusal” to certain incumbent personnel.  Based on the Executive Order, the SBA Office of Hearings and Appeals has previously held that hiring non-management personnel from a subcontractor is no longer evidence of unusual reliance under the ostensible subcontractor rule.

I emphasize “non-management” for a reason: the Executive Order does not apply to non-management personnel.  According to SBA OHA, hiring a subcontractor’s management team—particularly when the subcontractor is an ineligible incumbent—continues to be strong evidence of a violation of the ostensible subcontractor rule.

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

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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.

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SBA Affiliation Rules, the Passive Investor, and Weekend at Bernie’s

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Remember Weekend at Bernie’s, the 1980s comedy about a couple of young corporate employees who pretend their murdered boss is still alive?  (Random note: did you know that they made a Weekend at Bernie’s 2 in 1993?  Neither did I, until I was writing this post).

What does Bernie have to do with the SBA affiliation rules?  In the movie, Bernie appears to control his company—even though he is not exactly in a position to make executive decisions.  Like Bernie, in the SBA’s eyes, a person can be deemed to control a company, even if he or she does not actually exercise any power.  The decision of the SBA Office of Hearings and Appeals in Size Appeal of BR Construction, LLC, SBA No. SIZ-5303 (2011) shows that SBA affiliation problems can arise when bylaws and operating agreements contain certain provisions that the SBA will find give legal control to a minority owner, even if that minority owner, in practice, acts as a passive investor.

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Subcontractor’s Provision of Bonds OK with GAO—But Watch Out for Affiliation

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Small prime contractors often have difficulty securing necessary bid, performance and payment bonds for federal government contracts–especially in the construction industry, where payment and performance bonds are typically required.  Not surprisingly, small primes often turn to their larger subs to secure the necessary bonding.

A small prime’s reliance on its subcontractor for bonding was recently put to the test in a GAO bid protest.  Fortunately for small primes everywhere, in Shaka, Inc., B-405552 (Nov. 14, 2011), the GAO held that the subcontractor’s role in the bond process did not render the bond defective.  But small primes and their large subcontractors shouldn’t pop the champagne for a celebration, because subcontractor bonding assistance can still increase the risk of ostensible subcontractor affiliation.

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SBA OHA OK’s “Mystery Subcontractor” SBA Size Protests

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Can a contractor file an SBA size protest alleging so-called “ostensible subcontractor” affiliation, without knowing the identity of the subcontractor in question?  Yes.  According to the SBA Office of Hearings and Appeals, a size protest should not be dismissed as “non-specific” just because it alleges ostensible with an unknown subcontractor–or a “mystery subcontractor,” if one is inclined to be a bit more dramatic.

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Asset Purchases and SBA Affiliation: Buyer Beware

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If your small business is thinking about acquiring all or most of another company by way of an asset purchase agreement, you may wonder what effect it will have on your small business size status.  Yes, your company will be bigger now that it used to be, and will have to take that into account going forward.  But you may not be aware that an asset purchase agreement could create an affiliation problem and affect your size status looking backward, too.

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