On December 17, the Small Business Administration (SBA) published its final rule in response to its August 2024 proposed rule and the ensuing comments from the industry. The rule will have a substantial impact on the obligations of government contractors and the small business M&A landscape.

While the rule is long—over 60 pages— and covers several different small business topics, there are three critical components to investment opportunities in small businesses:

1. New recertification obligations.
2. Updated negative control rule for affiliation purposes.
3. Changes to 8(a) ownership percentages.

Below we discuss the recertification obligations and their impact on small business M&A. The other two changes will be covered in a future post.  

Changes to the M&A Landscape

The final rule requires small businesses to recertify their size status upon a triggering event like a merger or acquisition. It has been well established that unless a contracting officer (CO) requires size recertification, small businesses holding multiple-award contracts (MACs) remain eligible for awards under those MACs even if they are acquired by a large business and are no longer small. Under the final rule, this is no longer the case.

The final rule requires a small business to recertify its status in the following circumstances:

1. Within 30 calendar days of a merger, acquisition, or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest.
2. No more than 120 days prior to the end of the fifth year of a contract exceeding five years.
3. No more than 120 days prior to any option being exercised thereafter, and when requested to do so by the CO.

 If following the recertification, the concern is no longer small, it is ineligible to compete on the orders.

Pending Proposals

The timing of the M&A event is important. For example, if the M&A event occurs less than 180 days after the date of the offer but prior to award, the surviving concern is ineligible for the award. However, if the M&A event occurs more than 180 days after the offer but prior to award, the surviving concern remains eligible to receive a single or reserved award but is still ineligible to receive a pending award where the underlying award is a small business set aside or reserve MAC.

Eligibility for Options

The final rule differentiates between single award contracts and MACs for a concern’s continued eligibility to perform on options. The rule provides that concerns that recertify as other than small following a triggering event remain eligible for options on single award contracts; however, the agency cannot count the work toward its small business goals. In contrast, small businesses that recertify as other than small become ineligible for orders and options exercised under a MAC.

Additional Relevant Provisions in the Rule

Small Business Carveout. The final rule adds a carveout for M&A involving two small businesses. Even if the surviving entity is large, the company will remain eligible for set-aside orders under a MAC it was awarded when it was small.

“Agreements in Principle.” The proposed rule required recertification not only for consummated M&A activities but for agreements in principle. The final rule changed that. Recertifications will no longer be required for agreements in principle because SBA realized they may never be finalized.

Natural Growth. SBA added language in the final rule that where a small business becomes large through natural growth, rather than an M&A event, it may continue to qualify as a small business for eligibility purposes on orders or agreements so long as the CO does not require the business to recertify.

Joint Ventures. When a joint venture is required to recertify, it can do so in either of the following circumstances:

1. All the parties to the joint venture qualify as small.
2. The protégé small business in an active mentor-protégé joint venture qualifies as small.

No More Federal Supply Schedule (FSS) Exception. A well-established exception allowed small businesses that became large following an M&A event to remain eligible for set-aside orders and Blanket Purchase Agreements (BPA) issued under FSS contracts as size was previously understood to be determined at the date the underlying FSS contract was awarded. The final rule eliminates this exception making businesses with disqualifying recertifications ineligible to receive these set-aside orders and BPAs. In addition, this change does not benefit from the delayed effective date, but instead went into effect January 16, 2025.

Protests and Size Determinations. To enforce the rule, a MAC holder may:

1. File a size protest challenging the competition MAC holder’s recertification in connection with the M&A triggering event prior to the expiration of the fifth year of the MAC.
2. Request a formal size determination concerning the MAC holder’s size status following the recertification.

Effective Date. The final rule delays the effective date of the new recertification rules until January 17, 2026. As a result, for the next year, those SBA regulations in effect prior to January 16, 2025, continue to govern post-M&A recertifications.

Contractor Consideration

Long- and Short-Term Impact on M&A Activity

The final rule will have both short-term and long-term implications on government contractor M&A. In the short term, the delayed effectiveness of the rule will incentivize those large businesses considering the acquisition of a small business to complete their acquisitions or mergers within the next year. However, in the long term, the new recertification requirements will certainly devalue small businesses as potential acquisition targets. As a result, small businesses looking to sell should target January 16, 2026, as the absolute latest deadline to do so or risk receiving a lower price for their organizations.

In addition, the final rule creates a carveout for M&A involving two small businesses as the final rule states “[w]here two business concerns individually qualify as small before a merger, acquisition or sale but do not in the aggregate after such occurrence, the final rule allows the contract holder to remain eligible for orders issued under an underlying small business multiple award contract.” Going forward, this carveout may provide a boost to small businesses that wish to merge or acquire other small businesses.

Watch Out for Affiliates

Under the final rule, contractors must actively monitor their affiliates as triggering events that occur at one of the contractor’s affiliates require the affiliate to recertify. Pursuant to 13 C.F.R. § 125.12, triggering events that require recertification include a merger, acquisition, or sale of or by a concern or an affiliate of the concern, which creates a change in controlling interest. Therefore, the final rule imposes an additional responsibility on contractors not just to track their M&A activity and recertify when necessary but also to monitor the M&A activity occurring at a contractor’s affiliates.

Increased Protests

The recertification requirements increase potential avenues for protests. This increased litigation will come at a considerable cost to both the government and contractors and may impair governmental programs as it slows contract awards.

Going Forward

The rule will have a dramatic impact on small business M&A. While the delayed effectiveness of the rule may start a sprint to complete acquisitions over the short term, reducing the runway for contract performance on set-aside orders will reduce the value of small business targets in the long term. Contractors should also begin paying increased attention to M&A involving their affiliates and brace for increased protests.

If you have any questions regarding the proposed SBA rule on recertification or how it may impact your business, please contact the author.