SBA Common management and identity of interest disputes in size protest cases involve complex SBA affiliation regulations, that if violated can impact your ability to bid on future government contracts.
The following are pointers derived from the SBA. A basic understanding can help you avoid costly mistakes, such as common management problems when bidding on government contracts.
At the end of the day, the SBA looks at relationships between the business entity and other firms to see if there are undue reliance or control issues, such as common management or an identity of interest.
It is important to note that control does not have to be actual control of the business; in a size protest based upon affiliation, the SBA only has to find the ability to control. See information about assigning government contracts.
How Does SBA Determine Small Business Affiliation?
Small businesses have to keep their status as small under the SBA regulations. In a size determination or size protest, the SBA often looks at your business by counting receipts, employees, or other measures including all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 13 CFR 121.103 (a)(6). If the SBA finds common management or an identity of interest, you could have a problem.
SBA Affiliation Definition Rules & General Principles
13 CFR 121.103 governs SBA affiliation meaning and the common issues that can arise. There are complex and factual considerations that must be addressed. If you find them confusing, as most companies do, you may want to seek help from an experienced government small business size protest lawyer.
According to the SBA, business affiliation exists when one business controls or has the power to control another or when a third-party (or parties) controls or has the power to control both businesses.
Control may arise through ownership, common management, identity of interest, or other relationships or interactions between the parties.
Control can also be affirmative or negative. Negative control includes instances where a minority shareholder can, under the concern’s charter, by-laws, or shareholder’s agreement, prevent a quorum or otherwise block action by the board of directors or shareholders.
SBA Common Management Definition
The SBA affiliation meaning is often compromised through violation of the common management rule. Under the regulations, if one or more officers, directors, managing members, or general partners control a business concern, the Board of Directors and/or another business concern’s management, the concerns are affiliates and may be deemed affiliated. See 13 CFR 121.103(e) and 13 CFR 121.301.
Tip: SBA OHA has held companies must be controlled by someone at all times, and that SBA common management affiliation does not require that an individual manager exercise total control over a concern, merely that the individual manager possess critical influence or ability to exercise substantive control over business operations.
SBA affiliation in management problems can be very complicated and confusing. With the right argument and legal defense, you might be able to overcome getting the contract taken away.
SBA Identity of Interest Definition
When small businesses are intimately involved with other companies that have identical (or substantially identical) business or economic interests, SBA and size protest rules can treat them as one party unless they can prove otherwise.
SBA regulation 13 CFR 121.103(f)(1) states provide that:
(f) Affiliation based on identity of interest. Affiliation may arise among two or more persons with an identity of interest. Individuals or firms that have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.
(1) Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.
(2) SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.
(i) This presumption may be rebutted by a showing that despite the contractual relations with another concern, the concern at issue is not solely dependent on that other concern, such as where the concern has been in business for a short amount of time and has only been able to secure a limited number of contracts.
(ii) A business concern owned and controlled by an Indian Tribe, ANC, NHO, CDC, or by a wholly-owned entity of an Indian Tribe, ANC, NHO, or CDC, is not considered to be affiliated with another concern owned by that entity based solely on the contractual relations between the two concerns.
Tip: The SBA looks at a relationship between a parent and child as one which gives rise to the presumption of affiliation. See 13 CFR 121.103(f)(1).
Tip: Common management does not require the companies in question to have common ownership to find affiliation, because ownership and management are two separate grounds for affiliation, each governed by separate regulations — 13 CFR 121.103 (e) versus 13 CFR 121.103(c). Size Appeal of Perry Johnson & Assoc., Inc.
Tip: You are allowed to rebut any presumptions.
See information about: Small Business Size Standards, SBA Size Protests & Appeals Bid Protest Requirements.
What Can You Do To Defend Yourself in a Size Protest?
Under the SBA affiliation definition, family members, persons with common investments, or firms that are economically dependent on contractual (or other) relationships, are among those treated this way. You can seek to show that no SBA business affiliation definition is met under the identity of interest definition by providing evidence establishing that seemingly identical interests are, in fact, separate.
To minimize the impact in an SBA common management case you should be able to defend your case by addressing the clear line of fracture between the alleged individuals or family members. Size Appeal of Tenax Aerospace, LLC, SBA No. SIZ-5701, at 12 (2015).
Tip: You don’t want to focus the clear line of fracture by discussing how much (or not) the other is not involved in your business affairs. See Size Appeal of Gallagher Transfer & Storage Co., Inc., SBA No. SIZ-4295 (1998) (The presumption arises, not from the degree of family members’ involvement in each other’s business affairs but, rather, from the family relationship itself.)
Tip: Individuals in senior leadership positions, such as the CEO and COO, may be presumed to exercise substantive control over a firm’s operations, absent evidence to the contrary. Size Appeal of AudioEye, Inc., SBA No. SIZ-5477, at 8-9 (2013).
Tip: When defending a size protest based on affiliation through common management, you want an attorney that would not focus only on the argument that person exercising common management does not have total control of the business (this is not the legal standard).
- You want to focus on showing that the other person has no critical influence or the ability to exercise substantive control over the company’s operations. See Size Appeal of CopaSat, LLC, SBA No. SIZ-5918, at 5 (2018). Individuals in senior leadership positions, such as the CEO and COO, may be presumed to exercise substantive control over a firm’s operational services, absent
- You want to avoid commingling employees when subcontracting or teaming
- Avoid sharing facilities and other common resources
Establish a Clear Line of Fracture
SBA OHA has explained that “[a] clear line of fracture exists if the family members have no business relationship or ties or involvement with each other’s business concerns, or the family members are shown to be estranged.” Size Appeal of RGB Group, Inc., SBA No. SIZ-5351, at 7 (2012); Size Appeal of Hal Hays Constr., Inc., SBA No. SIZ-5217, at 6 (2011).
- Understand that my showing minimal amount of business or economic activity between two concerns does not prevent a finding of clear fracture. Size Appeal of GPA Techs., Inc., SBA No. SIZ-5307, at 6 (2011).
- Factors that may be relevant to the court in examining clear line of fracture include “whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant amount subcontracting between the companies; and whether the family members participate in multiple businesses together.” Size Appeal of Trailboss Enterprises, Inc., SBA No. SIZ-5442, at 5 (2013), recons. denied, SBA No. SIZ-5450 (2013) (PFR).
- Also be aware that courts have decided that “it is pertinent to a clear line of fracture analysis if the firms in question continue to subcontract with each other and one proposes the other as a subcontractor on the subject contract.” Size Appeal of ProSol Assocs., LLC, SBA No. SIZ-5813, at 7 (2017).
- OHA has determined that, when the concerns in question “propose to continue to work together on the contract at issue,” this “almost mandates the finding of no clear line of fracture.” Size Appeal of Megen-AWA 2, LLC, SBA No. SIZ-5845, at 9 (2017), recons. denied, SBA No. SIZ-5852 (2017) (PFR)
The above information shows that litigating and defending SBA size protest cases involving Common management problems and identity of interest regulations are common grounds for attack when submitting bid proposals for federal projects. See additional information about SBA affiliation rules.
For help with avoiding the SBA small business affiliation definition, call our SBA Size protest lawyers at 1-866-601-5518.