New SBA Rule on Small Business Size and Status Recertification and Its Impact on GovCon M&A
To say that the changes in the GovCon space are coming fast and furious in 2025 would be a gross understatement. There is no doubt that federal government contractors should continue to focus on how the Trump administration’s flurry of activity, including recently signed Executive Orders and the actions of the newly created Department of Government Efficiency (DOGE), may impact them and their Government customers. However, federal contractors classified as small business concerns or who hold a preferred socioeconomic bidding status (i.e., 8(a), SDVOSB, HUBZone, or WOSB) and have been awarded set-aside contracts would be well advised to educate themselves on the new final rule on recertification of small business size and status that was issued by the U.S. Small Business Administration (SBA) in December 2024.
To simplify recertification requirements, the new rule consolidates such requirements for all small government contractors into a single regulation codified at 13 C.F.R. §125.12. A summary of the changes implemented by this new rule are set forth below.
What was SBA’s motivation for the changes and the delayed implementation of certain provisions?
- In a nutshell, the underlying purpose of this new SBA rule is to eliminate the ability of large businesses that have acquired small businesses holding multiple award IDIQ set-aside contracts to exercise options and pursue new task order awards under such set-aside contracts. And while the motivation is understandable, this new rule is going to have a significant impact on the mergers and acquisitions (M&A) market for small federal contractors – both for entities affected by the changes reflected in the new rule and for potential buyers of those entities.
- Because of the far-reaching implications of the new rule, the SBA is delaying the implementation of certain of its provisions until January 17, 2026. As noted below, that delay provides ample incentive for both buyers and sellers considering a M&A transaction of an affected entity to prioritize getting such a deal done in 2025 so that the required recertification can be made before that date.
What aspects of SBA’s prior rules remain unchanged?
- Entities undergoing a change of control still must recertify as to their size and small business program status within thirty (30) days of the date triggering the obligation to recertify.
- Entities still have to recertify as to their size and status five (5) years after the award of a long-term set-aside contract, or if specifically requested to do so by a contracting officer (CO). If a disqualifying recertification is submitted based of the five-year requirement for long-term contracts or due to a specific request from a CO, the entity will still thereafter be ineligible for the award of options or new task orders under the affected set-aside contract.
- An entity submitting a disqualifying recertification following a change of ownership may (i) continue to perform work on single award set-aside contracts and existing task orders on reserved or set-aside MACs, and (ii) be awarded option year extensions and new task orders under single award set-aside contracts. As was the case before the new rule took effect, the only repercussion is that the procuring agency cannot continue to count the contract towards the achievement of its annual small business contracting goals.
- The portion of the 180-day rule pertaining to pending proposals submitted within 180 days of a M&A event triggering recertification remains in effect. If the triggering event causing a disqualifying recertification occurs within 180 days of offer submission but prior to award, the entity will no still be ineligible for award.
What changed effective January 16, 2025?
- There is now a distinction between set-aside contracts awarded as multiple award (MAC) vehicles and those set-aside contracts awarded as single award contracts. Before the rule change, small business concerns that submitted a disqualifying recertification were able to continue to perform work on all of its awarded set-asides (regardless of whether they were awarded as MAC vehicles or single award contracts). In addition, such entities were also able to secure option years on such contracts and continue to compete for set-aside orders under such contracts. The only consequence was on the procuring agency, which could no longer count the contract for its small business contracting goals.
- For one particular category of MAC vehicles (i.e., GSA Schedules), the change became effective as of January 16, 2025. A disqualifying recertification by an entity holding a GSA Schedule now results in the entity being immediately ineligible to participate competitions for task orders set-aside or reserved for the small businesses with the size and status claimed by the entity at the time its GSA Schedule was awarded.
- The portion of the 180- day rule pertaining to proposals submitted more than 180 days before the M&A event triggering recertification has been changed to make a distinction between single award set-aside contracts and MACs. If the triggering event causing a disqualifying recertification occurs more than 180 days after offer submission but prior to award, then the entity will be eligible for award provided that the proposal relates to a single award set-aside contract. However, the entity will be ineligible for award if the proposal relates to the award of a set-aside or reserved MAC.
- Small business acquirors and joint ventures must also now recertify as to size and status if they hold set-aside contracts.
- The new rule expressly permits size and status protests to be lodged on the basis of a challenged recertification.
- Note that the new rule does not require a small business becoming other than small through organic growth (rather than as a result of M&A activity) to recertify.
What will change after January 16, 2026?
- Generally, an entity submitting a disqualifying recertification after January 16, 2026 will be ineligible to be awarded option years or new task orders under set-aside or reserved MACs.
- SBA did carve out an exception under the limited circumstances where both parties to the M&A transaction could individually qualify as small under the applicable NAICs code for the set-aside contract in question. In that event, the rule permits the acquired entity to remain eligible for options and new task orders under that particular set-aside or reserved MAC vehicle.
What are the M&A implications for affected small business entities?
- Unless a sale of the entity can be closed in time to allow for a recertification of size and status before January 17, 2026, the portion of its valuation relating to set-aside or reserved MAC vehicles is going to significantly decrease because an acquiror will only be able to continue to perform already awarded work on such vehicles.
- To create value, there is now less incentive to secure set-asides awarded as MAC vehicles and more incentive to secure set-asides issued as single award contracts.
- Such small business entities should expect that their valuations and their pool of potential buyers to decrease after January 16, 2026.
What are the M&A implications for potential buyers of affected small business entities?
- Due diligence into the target’s contract portfolio and backlog takes on enhanced importance for valuation purposes. Each set-aside contract will need to be assessed and evaluated individually. Portfolios including set-asides awarded as MACs will have to be appropriately discounted.
- Certain potential buyers of such entities can expect to have additional leverage after January 17, 2026. For example, a potential buyer qualifying as small under the applicable NAICs code for a particular set-aside or reserved MAC contract will have the ability to take advantage of the small business buyer exception under the new rule.
If you have further questions about this new rule and its impacts on your business, please contact RLG Partner Peter Fish.
DISCLAIMER. This client alert does not provide legal advice. We are providing it for general informational purposes only.
