Prepare for Impact: Revised SBA Rules on Recertification and Negative Controls Expected to be Implemented
On December 17, 2024, the Small Business Administration (SBA) issued a final rule that made modifications to various facets of the SBA’s small business size and status programs. One major alteration includes the implementation of a new rule that alters the impact of recertification for businesses transitioning from small to large status after a merger or acquisition. Additionally, a standardized set of permissible negative controls for minority shareholders was introduced, expanding the controls minority investors can exercise in service-disabled veteran-owned small businesses (SDVOSBs), women-owned small businesses (WOSBs), and participants in the SBA’s 8(a) Business Development Program.
This final rule, effective as of January 16, 2025, with certain aspects of the recertification rule slated for implementation after a one-year grace period, signifies a significant shift in the landscape of small business acquisitions and mergers within the government contracting and investment realms.
The revised recertification regulations outlined by the SBA necessitate that small businesses undergoing mergers, acquisitions, novations, or other control changes must recertify within 30 days following such events. The new rules bring about a reduction in the set-aside period for multiple award contracts and GSA Schedules for affected contractors. The impact of recertification, termed as “disqualifying recertifications,” is vital as it affects the eligibility of businesses to receive new orders and options. In the case of MACs, a recertified contractor acquired by a large business becomes ineligible for set-aside orders, while GSA Schedule holders face restrictions as well. However, there are exemptions in place to safeguard entities where the acquirer also meets the small business criteria, ensuring continuity in awards albeit with certain limitations.
The changes in recertification protocols are expected to prompt an increase in M&A activities in the Government Contracting sector as companies rush to finalize transactions within the one-year safe harbor period to maintain their eligibility for future orders. By staying informed of the evolving guidelines and regulations, small business contractors and investors can make strategic decisions to navigate the changing landscape effectively. Additionally, the introduction of standardized negative controls for minority shareholders offers greater clarity and certainty, empowering investors in various types of small businesses.
Small business contractors and potential investors should remain vigilant for forthcoming alerts detailing other important aspects of the SBA’s Final Rule. The impact of these new regulations on the GovCon M&A and investment market will be significant, emphasizing the need for stakeholders to keep abreast of updates and adapt their strategies accordingly.
