Tag Archives: SBA affiliation rules

SBA Affiliation Rules and Spin-Offs: Beware ‘Newly Organized Concern’ Affiliation

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When a small business draws close to its size standard ceiling, it may consider forming a small business “spin-off” company as one way to keep itself in the small business set-aside game.  Done right, a spin-off may be able to successfully compete for and win small business set-aside contracts.

But be careful: if the spin-off doesn’t pass muster with the SBA, the “newly organized concern” affiliation rule may cause the spin-off to be ineligible for small business set-aside contracts, as occurred in Size Appeal of eTouch Federal Systems, LLC, SBA No. SIZ-5280 (2011), a decision of the SBA’s Office of Hearings and Appeals.

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SBA Affiliation Rules and Unanimity Provisions: Some SBA OHA Guidance

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A company’s minority owners often insist that certain  actions be approved unanimously or on a supermajority basis, giving the minority owner the ability to control (or at least veto) those actions.

But small government contractors must tread very carefully when it comes to unanimity or supermajority provisions in their bylaws, operating agreements, or other governing documents.  Although the SBA permits unanimity or supermajority provisions regarding certain “extraordinary” corporate actions, other unanimity or supermajority provisions may result in a finding that the minority owner exercises undue negative control over the company, leading to affiliation problems with other companies controlled by that minority owner.

The decision of the SBA’s Office of Hearings and Appeals in Size Appeal of DHS Systems, Inc., SBA No. SIZ-5211 (2011) offers some guidance as to which provisions pass muster under the SBA affiliation rules, and which do not.

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Contradictory, Post Hoc Statements Don’t “Fix” Ostensible Subcontractor Rule Problem

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When a small government contractor gets its hand caught in the “affiliation” cookie jar, the natural reaction is to scramble to fix the problem, even if it means contradicting the contractor’s own proposal.  But don’t expect post hoc efforts at fixing a problem with the SBA affiliation rules to pan out.  The SBA’s Office of Hearings and Appeals has held that where a contractor’s after-the-fact statements regarding affiliation contradict its proposal, the language of the proposal governs.

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SBA Affiliation Rules: SBA OHA Says Control is the Key

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The SBA affiliation regulation, 13 C.F.R. § 121.103, states that all affiliation is premised on the notion of control.  In other words, two companies are affiliated when the same person or entity controls or has the power to control both.

The size appeal decision of the SBA’s Office of Hearings and Appeals in Size Appeal of Manroy, USA, LLC, SBA No. SIZ-5244 (2011), explains that when there is no overlapping control, there is no affiliation, even if one or more of the indicia of affiliation described in the regulation might arguably be present.

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SBA OHA: Capital Contributions Not a Factor in Determining Affiliation

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A small government contractor needs to keep a close eye on its relationships with large businesses, as almost any type of interaction between the companies, such as contracts, bonding assistance, and overlaps in employees or officers may be considered evidence of SBA affiliation in a size appeal.  But, at least in one opinion issued by the SBA’s Office of Hearings and Appeals, the capital contributions of a large business member were irrelevant to an affiliation analysis.

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SBA Affiliation Rules and Economic Dependence: SBA OHA Backs off “70% Rule” (A Little)

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When I was young, my parents gave me my first weekly allowance.  Grand total: twenty-five cents.  It doesn’t sound like much now (and it wasn’t then, either—I’m not that old!) but it was still 100% of my income.  I was economically dependent on my parents.

When it comes to the SBA affiliation rules, a small business need not receive 100% of its revenues from another company in order to be considered an affiliate by virtue of economic dependence.  For several years, the SBA followed a hard-and-fast rule: if a small business earned 70% or more of its revenues from another company, the two businesses were automatically affiliated.

But in Size Appeal of Argus & Black, Inc., SBA No. SIZ-5204 (2011), the SBA’s Office of Hearings and Appeals backed off the bright-line 70% rule, at least a little.  In a commonsense decision, SBA OHA held that in limited circumstances, applying the 70% rule would be unfair.

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Applying for 8(a) Certification? Address Potential SBA Affiliation Problems First

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Affiliation under the SBA’s rules typically becomes a problem when a small business submits an offer on a set-aside procurement, and a competitor files an SBA size protest, challenging eligibility.  But the SBA will examine affiliation issues in other contexts, including when a small business submits an application for the SBA’s 8(a) Business Development Program.

As one unfortunate contractor recently learned, if you do not solve any affiliation problems before you submit your 8(a) application, the SBA may not only reject your 8(a) Program application, but deem you a large business, ineligible to obtain small business set-aside contracts in your primary NAICS code.

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