After issuing proposed regulations earlier this year and soliciting extensive public comment, the U.S. Small Business Administration (SBA) issued a final rule on December 17, 2024 introducing significant changes to certain of the regulations applicable to small business contractors planning for or actively pursuing merger and acquisition (M&A) transactions.

Set to take effect on January 16, 2025, the final rule, among other important updates (such as efficiencies for the HUBZone program, which are not the focus of this article), consolidates the rules regarding size and socioeconomic status recertification across the small business, 8(a) business development, HUBZone, Women-Owned Small Business (WOSB), and Veteran Small Business Certification (VOSB and SDVOSB) programs into one streamlined rule, clarifies SBA’s intent with respect to permissible control by minority investors in small businesses, and implements critical new guideposts pertaining to continuity of multiple-award contracts, contract option periods and pending set aside or reserve bids following an acquisition (some of which have a delayed effective date of January 17, 2026, which could drive deal flow in 2025).

While the new final rule touches various SBA regulations and will have a range of impacts on small business compliance (assuming the regulations survive the shift in administration), this article particularly focuses on the parts of the rule implicated in M&A transactions and which could shape the landscape of the GovCon M&A market during 2025 and beyond. If you are a GovCon business owner planning an exit or strategic acquisition in the near future, understanding these new regulations is critical for navigating the evolving landscape and maximizing value in transactions involving small businesses.

Key Changes Introduced by the SBA’s New Final Rule

Consolidation of Recertification Requirements

The SBA has unified recertification provisions across all small business contracting programs under a new section, 13 CFR § 125.12. This consolidation eliminates inconsistencies and establishes a clear framework for recertification of size and socioeconomic status, particularly after corporate changes such as mergers, acquisitions, or other changes in control of contractors.

Mandatory Recertification Following Change in Control Events

Prior to implementation of the new SBA rule, applicable Federal Acquisition Regulation (FAR) provisions somewhat vaguely required recertification of size and socioeconomic status by small business contractors “within 30 days after a merger or acquisition that does not require a novation[.]” As most M&A deals in the GovCon industry tend to be structured as mergers or stock sales (to avoid onerous and uncertain contract novation processes), this provision has been construed to require recertification following these sorts of change in control transactions.

The new SBA final rule taking effect later this week now clarifies that small businesses must recertify their size and socioeconomic status “within 30 calendar days of a merger, acquisition or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest.” To be clear, this applies to both the acquiring and acquired entities in the transaction if each has received a small business contract award, and to changes in control of upstream affiliates such as platform and other holding companies. However, in contrast to the prior rule, “agreements in principle” have been removed from the recertification timing framework, reducing concern which has permeated the industry that Letters of Intent or similar instruments will inadvertently trigger recertification requirements prior to deal closing.

Impact on Continuing Contract Performance Eligibility

The effect of size recertification can vary depending on the attributes and circumstances of the particular business and acquisition, but generally as it stands today (prior to the new rule’s effective date) if an acquired small business recertifies as large due to affiliation with the acquirer (regardless of its own individual size) or otherwise due to natural growth prior to the deal closing, a formerly small business contractor can nevertheless continue performing small business set aside contracts, have future options exercised under those contracts and pursue future small business task orders under multiple award contracts for the life of those contracts, provided that future work is not counted toward each procuring agency’s small business or program goals (and various exceptions apply).

Now, the new SBA final rule includes several key changes and clarifications with respect to this small business contract continuity framework:

• Where a business makes a “qualifying recertification” (such that the business has remained small or a qualified small business program participant), the business is generally considered to be small for up to 5 years from the date of the recertification, and remains eligible for set-aside or reserved awards unless there is a later disqualifying recertification (such as a subsequent change in control event, or the expiration of the 5^th year of a long-term contract).

• Where a business makes a “disqualifying recertification” (i.e., the business is now other-than-small or no longer a qualified small business program participant), then currently awarded set aside and reserved contracts, future option year exercise under such contracts, and pending and future bids for set aside and reserved opportunities could be impacted:

• Current Small Business Contracts: As was the case prior to the new final rule, following a disqualifying recertification the disqualified business can continue performing through the current period of performance on previously awarded small business contracts, but the agency can no longer count the continuing work toward its small business goals or to the particular socioeconomic category (8(a), WOSB, SDVOSB, or HUBZone), which can be critical for some contracting officers.

• Future Small Business Contracts and Task Orders: Following a disqualifying recertification, the business cannot submit bids for future set aside or reserved awards (including task orders under a multiple award contract) after the disqualifying event occurs (but remains eligible for unrestricted awards under a multiple award contract, and task orders issued under a single award small business contract). The new final rule does however contain an exception for “small-to-small” acquisitions where a small business acquired by or merged with another can remain eligible for set aside or reserved task orders issued under multiple award contracts. In either case, however, the agency cannot count any future set aside or reserved task orders for goaling purposes. These rules equally apply to orders and Blanket Purchase Agreements placed against the General Services Administration (GSA) Federal Supply Schedule (FSS) Multiple Award Schedule (MAS) contract, contrary to many other regulations which carve out the GSA FSS MAS.

• “One-Off” Task Order Recertification Requests Under Multiple Award Set Aside or Reserved Contracts: In cases where a contracting officer (CO) makes a specific request for recertification in connection with a specific task order or agreement under a multiple award contract that is set aside or reserved for small businesses, the business cannot receive that specific task order or agreement, but remains eligible for other set aside or reserved awards and unrestricted awards where the CO does not request such “one-off” recertification.

• Option Periods (eligibility depends upon the nature of the underlying contract):

• Single award small business set aside or reserve awards – options can still be exercised, though the option period cannot be counted for goaling purposes.

• Multiple award small business set aside or reserve contracts – the business can no longer receive options – a big shift from the status quo. However, the same “small-to-small” acquisition exception applies here as well, allowing small businesses acquired by another small to continue to receive options, though the option period cannot be counted toward the agency’s small business or socioeconomic goals.

• Pending Awards (≤180 days after bid): If the change of control or other event triggering the disqualifying recertification occurs within 180 days after a bid is submitted for an award set aside or reserved for small businesses, and prior to the date of official award, then the business will no longer be eligible to receive the award. This is consistent with the current rule.

• Pending Awards (>180 days after bid): If the disqualifying event occurs more than 180 days after the date a bid is submitted but prior to official award, then (i) the business can nevertheless receive the award if it is a single award or reserve (and the award will still count toward the small business goals of the agency, which  can be critical for some contracting officers), but (ii) the business cannot receive the award if it is a multiple award small business set aside or reserve contract. The latter marks a big change from the prior rule which allowed such bids for multiple award set aside contracts to be awarded if submitted prior to the 180-day period.

• Joint ventures required to recertify can do so as small where all parties to the JV qualify as small at the time of recertification, or in the case of an SBA-approved mentor-protégé JV, if the protégé remains small.

In short, effective January 16, 2025 (except where the one year delayed effective date applies, discussed below), a small business acquired by or otherwise affiliated with a large business will now (i) lose the ability to pursue future set aside and reserved task orders under current multiple award contracts, (ii) become ineligible to receive set aside and reserved awards under multiple award contracts bid upon more than 180 days prior to the closing of a change of control acquisition or other disqualifying event, and (iii) forfeit future option periods under set aside and reserved multiple award contracts, whereas small businesses acquired by another small business would retain eligibility for such future orders and options (but not pending bids).

These changes could significantly impact a contractor’s projected pipeline (and any enterprise value attributed thereto) and to some extent place a premium on acquisition bids from other small business contractors over those of large businesses or private equity.

The One Year “Ticking Clock” – Delayed Effective Date to January 17, 2026

Although these new recertification rules could have sweeping impacts on GovCon M&A market activity in general (more fully discussed below), in response to numerous public comments concerned with immediate imposition of these new rules, the SBA astutely included a delayed effective date for certain provisions.

Specifically, the rules laying out a disqualifying recertification’s impact on multiple award contracts as summarized above will not take effect until January 17, 2026, one year after the effective date of the final rule.

Importantly, this means that small businesses acquired by large businesses in the next calendar year will nevertheless remain eligible for future task orders issued under a small business multiple award contract and for options to be exercised prior to that delayed effective date, provided that the existing goal counting rule continues to apply, and the new rule for pending bids does not appear to be so delayed. Additionally, while a bit unclear, it does not appear that this delayed effective date applies to the GSA FSS MAS contract or related BPAs. Still, this could significantly incentivize both small and large businesses to pursue M&A activity in 2025 so as to preserve pipeline opportunities (and associated enterprise value) of small business contractors that may otherwise be lost due to a disqualifying recertification cutting off eligibility for future set aside or reserved task orders and certain option periods exercisable during that year. 

Permissible Controls by Minority Investors

Relevant to small businesses seeking minority investment rather than complete divestiture, the new SBA final rule also clarifies certain negative controls the SBA deems permissible for minority owners to have without the risk of a finding of affiliation which would lead to a change in size or socioeconomic status. Previously, the industry has been proceeding on the basis of a patchwork of case law from SBA’s Office of Hearings and Appeals (OHA) and scattered regulations across SBA’s programs, which are now more neatly organized and applied consistently to the small business, 8(a), WOSB and VetCert programs.

The final rule clarifies that a minority owner’s right to consent to or otherwise block the following actions will not, in and of itself, result in a finding of impermissible control, each of which were previously enumerated in the VetCert regulations and in SBA OHA case law, and which are now applicable to SBA’s other programs:

• Adding a new equity stakeholder or increasing the investment amount of an equity stakeholder;
• Dissolution of the company;
• Sale of the company or all assets of the company;
• The merger of the company; or
• The company declaring bankruptcy.

The final rule also adds two additional permissible controls:

• Amending the company’s governing documents to remove the minority owner’s authority to block the five above actions; plus
• Any other extraordinary action “crafted solely to protect the investment of the minority shareholders, and not to impede the majority’s ability to control the concern’s operations or to conduct the concern’s business as it chooses” (i.e., “catch-all” exception).

This “catch-all” exception incorporated in response to extensive public comment mirrors language from SBA OHA opinions and is intended to provide flexibility in crafting negative controls that may not fall neatly within the foregoing list but nevertheless are focused on protecting an investor’s investment rather than allowing for meaningful operational control of the business that would warrant an affiliation finding.

Overall, the codification of these permissible controls and uniform application across SBA’s various programs brings clarity and consistency to owners structuring their businesses and other stakeholders considering strategic investment transactions in the small business contractors.

Bottom Line

The SBA’s new rule introduces both challenges and opportunities for small and large businesses. By consolidating recertification requirements and introducing uniform compliance measures, the rule aims to enhance transparency in government contracting. However, navigating these changes requires proactive planning, strategic decision-making, and expert guidance.

Key takeaways for small business owners striving for sale and potential buyers surveying the market for growth and acquisition opportunities include:

• Recertification requirements triggered by change in control transactions will now be more uniformly applied across the SBA’s various contracting programs, which can facilitate due diligence where a target contractor has multiple set aside designations.
• The closing of any change in control transaction will trigger mandatory size and socioeconomic status recertification for small business targets (and by the acquiring firm).
• Beginning January 16, 2025, small businesses will have a tougher time factoring in certain pipeline revenue opportunities (such as unfunded backlog represented by future task orders and option years, as well as future BPAs and orders under GSA FSS MAS), which may lead to large firms offering lower valuation multiples and overall enterprise values to small businesses who rely heavily on set aside contracts.
• The rule’s exception for “small-to-small” acquisitions promises greater continuity of pipeline opportunities under multiple award set aside or reserved contracts, which could incentivize more activity between such strategic buyers and sellers.
• Large businesses may be highly motivated to acquire small businesses heavily reliant on small business set aside or reserve work in 2025 to beat the delayed effective date of January 17, 2026 and lock in the capability of the target firm to continue pursuing future set aside or reserved task orders and exercise upcoming options under multiple award contracts so as to maximize value.
• Updates to the affiliation standards should streamline negotiations and give strategic financial partners comfort making minority investments in small businesses due to clearer guidelines for negative controls permitted to protect such investments.

If you are considering an acquisition, planning a sale, or managing compliance for ongoing contracts and have questions on the new SBA regulations, please contact Zack Andrews at (703) 284-7283 or zandrews@beankinney.com, Chris Young at (703) 284-7252 or cyoung@beankinney.com, or Jordan Reed at (703) 284-7248 or jreed@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult an attorney. Any views or opinions expressed herein are those of the author and are not necessarily the views of the firm or any client of the firm.