SBA Affiliation Definition

Does Your Teaming Agreement Avoid the SBA Affiliation Definition? You Can be Exposed to Criminal Liability If DOJ Investigates You.

Some SBA small business affiliation rules and decisions can surprise you. If you are the awardee you want to be able to offer sound legal arguments why the protestor’s allegations of affiliation with another company are flawed. As the protestor in a small business size protest, proving affiliation can be a hurdle simply because not every contractor has the necessary details upfront.   The reality is the small businesses end up being investigated by the Department of Justice (DOJ) or SBA OIG for government contractor fraud where there is an allegation that one company or individual actually controlled the business in question and therefore violated SBA affiliation rules. When small businesses become subject to the SBA definition of affiliation, there is generally a government bid submitted where there are teaming agreements or joint venture agreement relationships.

Many small businesses find themselves struggling with the legal requirements to avoid affiliation. The best approach to avoid bid protests that alleged affiliation with your subcontractor is to have the relationship looked at by an SBA affiliation attorney during the bidding phase.

Each company’s facts and business relationships are different and have to be reviewed on a case-by-case basis. Having improper relationships can cause companies to lose the contract and income for their respective businesses. There are several decisions from SBA-OHA that address the various affiliation approaches and adverse decisions from the SBA.

General SBA Affiliation Definition & Control Meaning 

Although the new SBA affiliation rules reduce the chances of affiliation between similarly situated companies, cases are litigated every day because of the unique facts of each case. Your company can reduce the likelihood of losing a contract in a size protest by keeping the following points when applying the SBA affiliation definition. One controls a business when the ultimate business decisions either directly or indirectly rest with someone other than the legal business owner(s). Contractors should be aware that the courts not only look at what your signed documents say. Instead, they look at the facts and totality of the circumstances under C.F.R. § 121.103(a)(5). Improper business relationships can lead to an adverse size determination from the SBA. The ‘area office must find facts and explain why those facts caused it to determine that one concern had the power to control the other. See Size Appeal of Crew Training Int’l, Inc., SBA No. SIZ-6128, at 23 (2021) (quoting Size Appeal of Med. Comfort Sys., Inc. et al., SBA No. SIZ-5640, at 15 (2015))

• Under SBA affiliation rules, being affiliated with a teaming partner or subcontractor is all about who actually control or ability to control. 
• Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties control or has the power to control both. It does not matter whether the control is exercised, so long as the power to control exists. See also information on SBA 8a annual report, SBA form 601 and SBA Form 1450.
• SBA affiliation rules consider factors such as ownership, management, previous relationships with or ties to another concern, common investments and contractual relationships, in determining whether affiliation exists.
• Control may be affirmative or negative. Negative control includes, but is not limited to, instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.
• Affiliation may be found where an individual, concern, or entity exercises control indirectly through a third party.
• In determining whether affiliation exists, SBA will consider the totality of the circumstances and may find affiliation even though no single factor is sufficient to constitute affiliation. See also SBA Joint Venture Definition.
• In determining the concern’s size, SBA counts the receipts, employees, or other measures of the size of the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 

If you do end up meeting the SBA affiliation definition and there is improper business control, government contractor fraud can be the next step against you. This is where having the right SBA affiliation attorney can make the difference in being indicted and convicted of a crime.

Why is Your Company’s Size Critical?

To become eligible for the award of federal contracts your company must meet the definition of a “ small business concern” as defined in 13 CFR part 121.  Part of avoiding the affiliation meaning under SBA size standards means that at the end of the day your company size must be small.

Otherwise, you stand to lose the contract. Small business size is especially important when you are competing for small business set-asides, Historically Underutilized Business Zone (HUBZone) program contracts; Women-Owned Small Business (WOSB) and Service-Disabled Veteran-Owned Small Business (SDVOSB) program. SBA affiliation and the importance of maintaining SBA size rules are also very important for small business loan programs and grant programs.

SBA Affiliation Rules and Regulations

The SBA’s small business affiliation rules and regulations for its various programs (except SBIR/ STTR/ Business Loans/ Disaster Loans, and Surety Bonds) are found at 13 CFR 121.103. You can also find the regulations online in 13 CFR Part 121 of the Code of Federal Regulations (CFR). See SBA Joint Venture Agreements Will Get No Mercy When Violating Three in 2 Rule.

Important concepts and general principles of affiliation? Under the SBA’s affiliation definition and meaning, small business affiliation exists when your business controls or has the power to control another company or when a third party controls or has the power to control both businesses. Under the SBA rules, control can arise in a variety of circumstances including ownership, management, or other relationships or interactions between the parties.

Control may be either affirmative or negative. Negative control affiliation can include situations when a minority shareholder in the company has the ability, under the concern’s charter, bylaws, or its shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. There are also circumstances where courts have found third-party affiliation.

If your company is under federal investigation for SBA PPP loan fraud, please visit our PPP Loan Fraud Page today.

Small Business Affiliation Meaning Under 13 CFR 121.103 SBA Rules

The SBA affiliation definition can be tricky. When writing proposals, companies must be extremely careful about what tasks the teaming partner or subcontractor will be performing.  See also Small Business Set Aside Bid Protests. See Signs of Being Under Investigation (Federal)

• The general rule under the SBA affiliation meaning is that the prime contractor must perform the primary and vital requirements of the contract.

Government contractors that are not familiar with what does affiliation mean and the complex rules and legal applications should seek legal advice before submitting their proposals. Otherwise, they may become the subject of a small business-size protest. See more information about SBA affiliation rules and mergers and acquisitions of government contractors.

13 CFR Part 121.103 How does SBA Determine Affiliation?

(a)General Principles of Affiliation.

(1) Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties’ controls or has the power to control both. It does not matter whether the control is exercised, so long as the power to control exists.

(2) SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.

(3) Control may be affirmative or negative. Negative control includes, but is not limited to, instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.

(4) Affiliation may be found where an individual, concern, or entity exercises control indirectly through a third party.

(5) In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.

(6) In determining the concern’s size, SBA counts the receipts, employees, or another measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.

(7) For SBA’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, the bases for affiliation are set forth in § 121.702.

(8) For applicants in SBA’s Business Loan, Disaster Loan, and Surety Bond Guarantee Programs, the size standards and bases for affiliation are set forth in § 121.301.

Exceptions to SBA Small Business Affiliation Rules

When companies are making subcontracting arrangements with other companies, not every situation runs afoul of the SBA small business affiliation definition. For example and according to the Legal Information Institute (LII), 13 CFR 121.103 makes an exception for the following:

• Business concerns owned in whole or substantial part by investment companies licensed, or development companies qualifying, under the Small Business Investment Act of 1958.
• Business concerns owned and controlled by Indian Tribes, Alaska Native Corporations (ANCs) organized pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. 1601et seq.), Native Hawaiian Organizations (NHOs), Community Development Corporations (CDCs) authorized by 42 U.S.C. 9805, or wholly-owned entities of Indian Tribes, ANCs, NHOs, or CDCs are not considered affiliates of such entities.
•  Business concerns that are part of an SBA approved pool of concerns for a joint program of research and development or for defense production as authorized by the Small Business Act are not affiliates of one another because of the pool.

• Business concerns that lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (PEO) are not affiliated with the leasing company or PEO solely on the basis of a leasing agreement.

• For financial, management or technical assistance under the Small Business Investment Act of 1958, as amended, (an applicant is not affiliated with the investors listed in paragraphs (b)(5) (i) through (vi) of this section.

• A firm that has an SBA-approved mentor-protégé agreement authorized under 13 CFR 124.520 or § 125.9 is not affiliated with its mentor firm solely because the protégé firm receives assistance from the mentor under the agreement. Similarly, a protégé firm is not affiliated with its mentor solely because the protégé firm receives assistance from the mentor under a federal mentor-protégé program where an exception to affiliation is specifically authorized by statute or by SBA under the procedures set forth in § 121.903. Small buisiness affiliation may be found in either case for other reasons as set forth in this section. See SBA Joint Venture Rules & SBA Approval.
• The member shareholders of a small agricultural cooperative, as defined in the Agricultural Marketing Act (12 U.S.C. 1141j), are not considered affiliated with the cooperative by virtue of their membership in the cooperative.
•  These exceptions to affiliation and any others set forth in 13 CFR 121.702 apply for purposes of SBA’s SBIR and STTR programs.
•  In the case of a solicitation for a bundled contract, a small business contractor may enter into a Small Business Teaming Arrangement with one or more small business subcontractors and submit an offer as a small business without regard to affiliation, so long as each team member is small for the size standard assigned to the contract or subcontract. The agency shall evaluate the offer in the same manner as other offers with due consideration of the capabilities of the subcontractors. See SBA Certificate of Competency COC Program & Bid Protests.

What Happens if the SBA Finds Your Company Affiliated with Another Company?

The answer depends. The most important result is that once affiliation is found if you are the prime contractor, the entire contract can be taken away. This means that you could lose hundreds of thousands, or millions in company revenues.  However, if the cumulative size for the affiliated companies is below the NAICS size standard, then the contract may still be awarded. This is where having an experienced SBA small business affiliation attorney can be very beneficial.

What Are Common Mistakes to Avoid During SBA Affiliation Litigation

Mistakes by Protestors: When you file a small business size protest alleging that the successful awardee is affiliated with its subcontractor, avoid making conclusory opinions or using words of uncertainty.  A lack of specificity in an SBA protest will get your case dismissed. Examples of situations to avoid include: failing to include any evidence to support your allegations of affiliation; alleging affiliation without presenting any evidence that combined size of allegedly affiliated firms exceeded size standard; using terms such as “maybe affiliated, more than likely is affiliated. These all are looked at as being too speculative.

Mistakes by Intervenors (Successful Awardee): When you are defending or intervening in a small business size protest case, common mistakes that can lead to an adverse decision in a size determination include: Failing to provide documents or information requested by the Area Office. This leads to courts to apply the adverse inference rule.’ The SBA can infer that if you did provide the information it would lead to a conclusion that your company was other than small; another mistake is failing to rebut presumptions. An example of this includes the rebuttable presumption against identity of interest or familial relationships. Here, the SBA does not have to necessarily ask. Instead, despite the SBA’s affiliation definition, it is up to the small business to rebut the presumption of affiliation; failing to address every allegation in the bid protest. This is a common flaw that can lead to an adverse size determination.

Who Can Decide Small Business Affiliation and Control Issues?

Per congressional mandate under the Small Business Act, only the SBA can decide business control and small business affiliation disputes. The SBA, under 13 CFR 121.103, decides issues of affiliation and control. Interested parties, that are bound by the decision, then have the legal right to appeal l ecisions to the SBA Office of Hearings and Appeals (OHA). Other agencies cannot decide business control matters as set forth in 13 CFR 121.103 unless the SBA authorizes that agency in a statute to do so. Failure to do so can have grave consequences in criminal trials where the defendants are deprived of the administrative process to be heard and to challenge the SBA decisions. This can then lead to a violation of the Due Process Clause of the Constitution (Procedural Due Process.) Under the PPP loan fraud investigations, the DOJ and SBA have a joint effort to handle fraud cases.

Get Immediate Help from Top SBA Affiliation Attorneys

For help applying the SBA affiliation definition and its associated rules to your teaming and SBA subcontracting relationships, call Watson’s government contractor fraud lawyers and government contract and SBA attorneys at 1-866-601 5518. FREE INITIAL CONSULTATION.