iAs discussed previously in this blog series, the Small Business Administration (SBA) sets 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.
So far, we have explained SBA Affiliation arising from:
- Stock ownership;
- Stock options, convertible securities, and agreements to merge; and
- Common management
Under 13 CFR § 121.103(f) affiliation can also be based on identity of interest. When two or more businesses are linked through family relationships or economic dependence through contractual relationships, they are considered one party. This means that their interests are aggregated for the purpose of size determinations.
For identity of interest through familial relationships, there is a presumption of affiliation between businesses owned or controlled by married couples, parties to a civil union, parents, children, and siblings. This presumption can be rebutted by showing a clear line of fracture. For example, a clear line of fracture exists if there is demonstrated estrangement between the family members, if they operate in different industries, have no overlap in customers, do not serve on one another’s boards or C-suites, or have no loans or subcontract relationships.
A 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 (December 7, 2011). However, when the concerns in question express an intent to continue to work together on a contract, there is almost always a finding of no clear fracture. Consider this example where a son expressed intent to lease premises and subcontract 10% of a job to his father’s large company. The SBA Office of Hearings and Appeals (OHA) determined that the ongoing relationship and loans from the father to son were a basis for affiliation under identity of interest. Even when he asserted on appeal that he no longer intended to use his father’s company for any of the work, the OHA held that size determinations are based on assertions made at the time you self-certify your size. Size Appeal of: Cazador Investments LLC, SBA No. SIZ-6048, 2020 (February 13, 2020).
Economic dependence is another way to find identity of interest. A contractual relationship between two firms where one is dependent on the other for 70% or more of its revenue for the three years prior to certification will result in a finding of affiliation, even if there are no other ties between them. A business can rebut the presumption of dependence by showing that its relationship of dependence has ended. In promulgating the rule SBA did not want to adversely impact start-ups or a firm which operates in a unique industry where there might be a limited number of other businesses with which to establish contractual relationships. Size Appeal of: Darton Innovative Technologies, Inc., SBA No. SIZ-6085, 2020 (December 10, 2020).
Keep in mind that familial relationships and economic dependence are each a separate basis for affiliation under 13 CFR § 121.103(f)(1) and (f)(2), respectively. It is not necessary that both circumstances be present for your business to be affiliated with another based on identity of interest.
SMGG thanks summer associate Krystel G. Becker for her assistance with writing this blog.
This blog is the fourth installment in a series that explains how the SBA determines affiliation under 13 CFR § 121.103. Stay tuned!
