As discussed in the first two installments of this series, the Small Business Administration (SBA) promulgates rules on the size standards under which businesses may qualify as “small.” Your business must meet the relevant size standards (i.e., according to the NAICS code for your industry) if you’d like to qualify for certain business development programs or certifications such as DBE, WOSB, EDWOSB, VOSB, SDVOSB or other SBA programs.

Whether or not your business is affiliated with another can be a determining factor in meeting the SBA requirements to be categorized as small. We previously discussed stock ownership under 13 CFR 121.103(c) and stock options, convertible securities, and agreements to merge under 13 CFR 121.103(d) as possible bases for finding affiliation.

Another basis for finding affiliation is common management under 13 CFR 121.103(e). This means that there will be affiliation when one or more officers, directors, managing members, or partners who control the board of directors and/or management of one concern also control the board of directors or management of another concern(s). The SBA Office of Hearings and Appeals (OHA) has held all concerns “must be controlled by someone at all times, and that 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 a concern’s operations.” Size Appeal of: ZLynx Enterprises, Inc., Appellant, SBA No. SIZ-6010, 2019 (June 11, 2019) (citing Size Appeal of Technibilt, Ltd., SBA No. SIZ-5304 (2011) and Size Appeal of CTSI-FM, LLC, SBA No. SIZ-5809, at 11 (2017)).

This critical influence or ability to exercise substantive control therefore would have to be held by someone in an overall management position in both entities (e.g., members of the board, persons in the C-Suite, majority or controlling shareholders). It is important to note that common management does not require common ownership. These are two separate forms of affiliation governed by separate rules—13 CFR 121.103(e) and (c), respectively. Affiliation can be based upon a finding on common management alone. 

Consider this example where two members of the C-Suite for a business that on its own would have been small, were directors at one non-profit, and members of the board for another non-profit concurrently. The OHA found affiliation based on common management and the aggregation of the annual receipts for the three entities exceeded the size standard to be considered small.

SMGG thanks summer associate Krystel G. Becker for her assistance with writing this blog.