Procurment Lawyer

Avoiding Premature Affiliation Under the SBA’s Present Effect Rule

by Francis G. Massaro

Francis G. Massaro is an attorney with the Administrative Conference of the United States and recently obtained an LLM in business and finance law from George Washington University Law School. Any opinions are those of the author and do not reflect the position of the U.S. government.

The Small Business Administration’s (SBA’s) affiliation rules explain how a concern’s business relationships affect its size and eligibility for a variety of federal procurement opportunities. The SBA’s affiliation rules generally focus on common ownership and management between two concerns. However, the rules also extend to some business relationships before they are fully consummated. Under the present effect rule, the SBA will find that two concerns are affiliated before they consummate a merger or acquisition if they have established an agreement to merge. An unwary small business concern contemplating a merger or acquisition may lose its small business status even if it has not yet consummated the agreement, agreed to all contractual terms, or closed the deal. As a result, the timing of an agreement to merge under the present effect rule has significant importance for a concern’s affiliations. A concern can take many steps, including leaving key terms unresolved and thoroughly documenting the progress of negotiations, to protect itself from a premature finding of an agreement to merge.

This article explores the SBA’s size standards that determine whether a concern qualifies as a “small business concern” under the Small Business Act. It focuses on the applicability of the SBA’s present effect rule and explores decisions from courts and the SBA’s Office of Hearings and Appeals (OHA) evaluating agreements to merge. Finally, the article provides considerations and recommendations for small business concerns contemplating a merger or acquisition to protect themselves from affiliation under the present effect rule.

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