SBA Size Appeals – Affiliation & Newly Organized Concern Rule

When you are faced with a SBA size appeal and small business size standard determination based upon affiliation and common ownership, small businesses must be very careful when forming spin-

off companies and where there are corresponding majority and minority ownership interest in both companies.

When there are substantial amounts of subcontracting between companies where husband or wives own shares or are officers or directors of the other businesses a size appeal protest will be denied.

Newly Organized Concern Rule 

When reviewing a violation of small business size standards under a size appeal, the newly organized concern rule consists of four required elements:

(1) the former officers, directors, principal stockholders, managing members, or

key employees of one concern organize a new concern;

(2) the new concern is in the same or related industry or field of operation;

(3) the persons who organized the new concern serve as the new concern’s officers, directors, principal stockholders, managing members, or key employees; and

(4) the one concern is furnishing or will furnish the new concern with contracts, financial or technical assistance, indemnification on bid or performance bonds and/or other facilities, whether for a fee or otherwise.

If these four elements are met, affiliation may be rebutted by demonstrating a clear line of fracture between the two concerns. Failure to defeat this requirement will result in a loss in an SBA size appeal to OHA.

Purpose of Size Appeal Protest based Upon the Newly Organized Concern Rule

The purpose of the newly organized concern rule is to prevent circumvention of the size standards by the creation of “spinoff” firms that appear to be small, independent businesses but are, in actuality, affiliates or extensions of large firms.

A size appeal protest can be decided based upon the totality of the circumstances. The SBA can identify the following as suggestive of reliance:

• If the two companies “share common ownership”;
• If royalty payments are made from one company to the owner of another
•  If  one company receives a percentage of revenues from another

Spin off companies are highly scrutinized and a recent subject of small business SBA size determinations appeals and bid protests. You should be extremely careful when venturing into this ‘hornet’s nest.”

You should seriously consider seeking legal advice from an experienced government contracts attorney. Call 1-866-601-5518.

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