Takeaways

The new five-year measurement period becomes effective on January 6, 2020 and will apply to both service and non-service industries.
This rule 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 SBA will allow firms to choose between the three-year and five-year lookback period until January 6, 2022.

On December 5, 2019, the U.S. Small Business Administration (SBA) issued a final rule to implement the Small Business Runway Extension Act of 2018, which extends the period, from three to five years, for contractors under receipts-based size standards to determine eligibility for small business size status, including for set-aside contracts. This rule was preceded by the SBA’s proposed rule, which was issued in June 2019, as discussed in a previous alert. The final rule adopts the changes set forth in SBA’s proposed rule, with two notable exceptions. First, the final rule will not apply to the SBA’s Business Loan and Disaster Loan Programs. Second, the SBA is implementing a two-year transition period during which a firm may choose between calculating receipts using a three-year average or a five-year average. This transition period will allow firms with declining revenues in recent years to exclude higher revenue years, and remain or requalify as small businesses.

In an effort “to promote consistency government-wide on small business size standards,” the final rule will apply this five-year measurement period to both service and non-service industries. Specifically, the rule states that “SBA is adopting a five-year averaging period for calculating the annual receipts of businesses for all industries that are subject to its 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 … for a business that is engaged in both service and non-service industries to use a five-year average for determining small business status in a service industry but switch to a three-year average for a non-service industry.”

The rule also explains the SBA’s views on its former affiliate rule, stating that “SBA believes that it is not logical to allow a firm to exclude the receipts of a former division just because that division was sold, since those receipts accrued to the concern.” SBA instructs that “there really is a difference between the sale or acquisition of a segregable division as opposed to the sale or acquisition of a separate legal entity,” explaining that “[t]he sale or acquisition of a division is not a question of affiliation. It simply represents an addition or subtraction to the concern itself. This is distinct from the sale or acquisition of a separate legal entity, which implicates questions of affiliation.” As such, the final rule clarifies that “the former affiliate rule does not permit a concern to adjust its receipts when the concern sells a segregable division that is not a separate legal entity.”

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

The final rule will become effective January 6, 2020, with a two-year transition period until January 6, 2022.