The new five-year measurement period will apply to both service and non-service industries.
This will allow many advanced small businesses to remain small longer and may allow mid-sized businesses that recently lost their small business status to qualify again as small.
The proposed rule also clarifies how companies are to calculate revenue related to the sale or acquisition of corporate divisions as opposed to subsidiaries.

On June 24, 2019, the U.S. Small Business Administration (SBA) issued a proposed rule to extend the period from three to five years for contractors under receipts-based size standards to determine eligibility for small business status, including set-aside contracts. This proposed rule implements the Small Business Runway Extension Act of 2018, which was discussed in a previous alert .

In an effort “to promote consistency government-wide on small business size standards,” the SBA proposes to apply this five-year measurement period to both service and non-service industries. Specifically, the proposed rule states that “SBA proposes to adopt a 5-year averaging period for calculating the annual receipts of businesses for all industries that are subject to receipts-based size standards, including the retail trade, agricultural, and construction industries.” This is a broader application than required by the Runway Act, which only extended the calculation period from three to five years for service providers. SBA correctly observed that “it would be confusing to apply SBA’s size standards for a business that is engaged in both service and non-service industries to use a 5-year average for determining small business status in a service industry but switch to a 3-year average for a non-service industry.”

In the proposed rule, SBA provides extensive data explaining the impact that the changes will have on small businesses. For example, it states that the calculation period extension will benefit advanced small and mid-sized businesses, because “the 5-year average will generally be lower than the 3-year average, thereby allowing: (i) Mid-sized businesses who have just exceeded size standards to regain their small business status, and (ii) advanced small businesses close to exceeding the size standard to retain their small business status for a longer period.” SBA, however, warns that this could potentially have negative impacts on smaller small businesses because it will increase the competition for small business set-aside contracts “by enabling mid-size businesses to regain small business status and by lengthening the small business status of advanced and successful larger small businesses.”

The proposed rule also explains that the “SBA believes that the sale or acquisition of a division is different from buying or selling a separate legal entity and, as such, should be treated differently.” As such, the proposed rule clarifies that “the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division,” but that the annual receipts “of a former affiliate are not included if affiliation ceased before the date used for determining size.”

The proposed rule instructs that, for certifications submitted prior to the final rule’s effective date, the SBA will continue to apply the three-year period for calculating a company’s annual average receipts for all revenue-based size standards. It is not yet clear when the proposed rule will become final.

Finally, the proposed rule makes no revisions to the SBA’s rules for employment-based size standards, which are primarily utilized in the manufacturing industries.

Comments on the proposed rule must be submitted to the SBA by Aug. 23, 2019.