Small Business Size Standards

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NOTICE: SBA Increases Time Period for Calculating Annual Receipts of Small Businesses from 3 Years to 5 Years for Size Standard Purposes

Effective January 6, 2020, for size standard purposes, SBA is increasing the time period for calculating small business annual receipts from 3 years to 5 years. Receipts will be averaged over a business’s latest five complete fiscal years to determine the average annual receipts.

 


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Small Business Size Standards: Calculation of Annual Average Receipts

A Rule by the Small Business Administration on 12/05/2019

AGENCY:

U.S. Small Business Administration.

ACTION:

Final rule.

SUMMARY:

The U.S. Small Business Administration (SBA or Agency) is modifying its method for calculating average annual receipts used to prescribe size standards for small businesses. Specifically, in accordance with the Small Business Runway Extension Act of 2018, SBA is changing its regulations on the calculation of average annual receipts for all of SBA’s receipts-based size standards, and for other agencies’ proposed receipts-based size standards, from a 3-year averaging period to a 5-year averaging period, outside of the SBA Business Loan and Disaster Loan Programs. SBA intends to seek comment on the Business Loan and Disaster Loan Programs in a proposed rule through a separate rulemaking. For all other programs, SBA adopts a transition period through January 6, 2022, during which firms may choose between using a 3-year averaging period and a 5-year averaging period.

DATES:

This rule is effective January 6, 2020.

FOR FURTHER INFORMATION CONTACT:

Khem R. Sharma, Ph.D., Chief, Office of Size Standards, (202) 205-6618 or sizestandards@sba.gov.

SUPPLEMENTARY INFORMATION:

Background Information

Public Law 115-324 (the “Small Business Runway Extension Act of 2018”) amended section 3(a)(2)(C)(ii)(II) of the Small Business Act, 15 U.S.C. 632(a)(2)(C)(ii)(II), to modify the requirements for proposed small business size standards prescribed by an agency without separate statutory authority to issue size standards.

Under section 3(a)(2)(C)(ii) of the Small Business Act, as amended, an agency without separate statutory authority to issue size standards must satisfy three requirements to prescribe a size standard. First, the agency must propose the size standard with an opportunity for public notice and comment. Second, the agency must provide for determining the size of a manufacturing concern based on a 12-month average of the concern’s employment, the size of a services concern based on a 5-year average of gross receipts, and the size of another business concern on the basis of data of not less than 3 years. Third, the agency must obtain approval of the contemplated size standard from the SBA Administrator.

In contrast to agencies subject to section 3(a)(2)(C), SBA has independent statutory authority to issue size standards. Under section 3(a)(2)(A) of the Small Business Act, the SBA Administrator may specify detailed definitions or standards by which a business concern may be determined to be a small business concern for the purposes of SBA’s programs or any other Federal Government program. Section 3(a)(2)(B) of the Small Business Act further provides that such definitions may utilize the number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors. To determine eligibility for Federal small business assistance, SBA establishes detailed size definitions for small businesses (usually referred to as “size standards”) that vary from industry to industry reflecting differences among the various industries. SBA typically uses two primary measures of business size for size standards purposes: (i) Average annual gross receipts for businesses in services, retail trade, agricultural, and construction industries, and (ii) average number of employees for businesses in all manufacturing, most mining and utilities industries, and some transportation, information and research and development (R&D) industries. SBA uses financial assets for certain financial industries and refining capacity, in addition to employees, for the petroleum refining industry to measure business size standards purposes.

The SBA’s size standards are used to establish eligibility for a variety of Federal small business assistance programs, including for Federal Government contracting and business development programs designed to assist small businesses in obtaining Federal contracts and for SBA’s loan guarantee programs, which provide access to capital for small businesses that are unable to qualify for and receive conventional loans elsewhere. The Federal Government contracting programs that use SBA’s size standards include the SBA’s 8(a) Business Development (BD) program, the Historically Underutilized Business Zones (HUBZone) program, the Service Disabled Veteran-Owned Small Business (SDVOSB) program, the Women-Owned Small Business (WOSB) program, and the Economically Disadvantaged Women-Owned Small Business (EDWOSB) program. SBA’s Small Business Investment Company (SBIC), Certified Development Company (CDC/504), and 7(a) loan programs use either the industry-based size standards or tangible net worth and net income based alternative size standards to determine eligibility for those programs.

SBA has long interpreted section 3(a)(2)(C) of the Small Business Act as not applying to SBA’s size standards issued under section 3(a)(2)(A). In the preambles to the proposed and final Start Printed Page 66562rules implementing 3(a)(2)(C), SBA explained that the Small Business Act requires that other Federal agencies either use SBA’s size standards or use their own size standards that meet the requirements as set forth in that section. 65 FR 4176 (Jan. 26, 2000) and 67 FR 13714 (March 26, 2002). In the final implementation in 2002, SBA interpreted section 3(a)(2)(C) as applying only to non-SBA agencies, stating, “Unless a statute specifies size standards for an agency’s program or gives an agency direct authority to establish size standards, the agency must use the applicable size standards established by SBA.” However, the Act allows an agency to “prescribe a size standard for categorizing a business concern as a small business concern (see sec. 3(a)(2)(C) of the Act) provided that the contemplated size standard meets certain criteria, and the agency obtains approval of the SBA Administrator.” 67 FR 13714. For further details on section 3(a)(2)(C) not applying to SBA’s size standards, see the proposed rule (84 FR 29399).

Nevertheless, to promote consistency government-wide on small business size standards, on June 24, 2019 (84 FR 29399), SBA issued for comments a proposed rule to change its method for calculating average annual receipts for all SBA’s receipts-based size standards and other agencies’ proposed receipts-based size standards for firms in services industries from a 3-year averaging period to a 5-year averaging period.

SBA determined that it would be confusing for a service-industry business concern to use a 3-year average for SBA’s receipts-based size standards and switch to a 5-year average for another agency’s receipts-based size standards. Similarly, 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. Thus, although section 3(a)(2)(C), as amended, permits another agency to use a 3-year average outside of the service industries, SBA is adopting a 5-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.

In accordance with Public Law 115-324, SBA proposed to change the averaging period for calculating annual receipts for other agencies’ receipts-based size standards for firms in services-industries from 3 years to 5 years and to maintain the 3-year averaging period for calculating the size for non-services firms. To promote consistency and avoid confusion, in this final rule, SBA is adopting the same 5-year averaging period for all receipts-based size standards issued by other agencies as well. More than 40 comments to the proposed rule, as discussed below, expressed support for adopting the same 5-year averaging period for all SBA receipts-based size standards. Of those, 3 also recommended using the same averaging period for all receipts-based size standards prescribed by other agencies.

This final rule carries out the intent of Public Law 115-324, as expressed in the Report of the House Committee on Small Business, H. Rpt. 115-939, with respect to Federal procurement opportunities. The Committee report states that, to help advanced small businesses successfully navigate the middle market as they reach their small business size thresholds, the bill would lengthen the time in which the SBA measures size through revenue, from the average of the past 3 years to the average of the past 5 years. The Committee report states that the bill would reduce the impact on small businesses from rapid growth in some years which would result in spikes in revenue that may prematurely eject a small business out of their small business status. The Committee report adds that the bill would allow small businesses at every level more time to grow and develop their competitiveness and infrastructure, before entering the open marketplace. The bill, as the Committee report states, would also protect Federal investment in SBA’s small business procurement programs by increasing chances of success in the middle market for newly graduated firms, resulting in enhanced competition against large prime contractors.

As stated in the Committee report, during the period when annual revenues are rising, 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. In the proposed rule, SBA noted that, when annual revenues are declining, the 5-year average may be higher than the 3-year average. This would cause small businesses near the size thresholds to lose their small business status sooner under the 5-year average than under the 3-year average. This is more likely to happen during economic downturns. Businesses that lose their small business status under the 5-year average may be disadvantaged further because they may have to wait several years more to regain their small business status, as compared to under a 3-year average. The proposed rule added that newly established firms that have been in business for less than 5 years will receive no benefit from a change to a 5-year average. A firm that has been in business for less than the averaging period simply annualizes the receipts from its full existence.

Additionally, SBA also stated in the proposed rule that 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 longer averaging period may disadvantage smaller small businesses in more need of Federal assistance than their more advanced and larger counterparts in competing for Federal opportunities. Similar to concerns from mid-size businesses that they lack necessary resources, past performance qualifications, and expertise to be able to compete against very large businesses in the full and open market, SBA has also received concerns from smaller small businesses that they also lack resources, past performance qualifications, and expertise to be able to compete against more resourceful, qualified, and experienced larger small businesses for Federal opportunities for small businesses.

In its June 24, 2019 proposed rule, SBA sought comments on its proposal to change the averaging period for the calculation of average annual receipts for all receipts-based size standards from 3 years to 5 years.

1. SBA sought feedback, along with supporting facts and analyses, on whether the Agency should calculate average annual receipts over 5 years for all industries subject to receipts-based size standards and on whether it should use a 5-year average annual receipts for businesses in services industries only and continue using a 3-year average annual receipts for other businesses. SBA was concerned that the latter option may create confusion for both businesses in reporting their size based on average annual receipts and contracting personnel in verifying the size of bidders to Federal contracts.

2. SBA sought input on how the use of average annual receipts over 5 years instead of 3 years would impact both smaller small businesses and more advanced, larger small businesses in terms of getting access to Federal opportunities for small businesses.Start Printed Page 66563

Additionally, SBA requested comments on its clarification of how annual receipts should be calculated in connection with the acquisition or sale of a division. The proposed rule provided that the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement. This is distinct from how SBA treats the sale or acquisition of a subsidiary that is a separate legal entity.

In this final rule, SBA adopts the changes as stated in the proposed rule, with two modifications. First, in response to comments, SBA is not including the 7(a) Loan Program, the Microloan Program, the Intermediary Lending Pilot Program, and the Development Company Loan Program (collectively, the “Business Loan Programs”) in this present change. SBA also is not including Physical Disaster Business Loans, Economic Injury Disaster Loans, Military Reservist Economic Injury Disaster Loans, and Immediate Disaster Assistance Program loans (collectively, the “Disaster Loan Programs”). At a later date, SBA will issue a proposed rule to seek additional input to assess the impact of any changes to the Business Loan and Disaster Loan Programs. Second, for all other SBA programs, including the Federal procurement programs, SBA adopts a two-year transition period through January 6, 2022. During the transition period, a firm may choose between calculating receipts using a 3-year average or a 5-year average.

To read the rule full documentation in the final rule visit: https://www.federalregister.gov/documents/2019/12/05/2019-26041/small-business-size-standards-calculation-of-annual-average-receipts

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