Tag Archives: SBA affiliation rules

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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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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