SBA and The Rules of Affiliation – Is Your Business In Compliance?

 

The  SBA  provides  significant  Federal  Contract  advantages  to  certain  small  businesses  pursuant  to  the regulations  and  laws  of  Federal  procurement  law  under  the  Small  Business  Act.   However,  these advantages were created for small businesses only. Over the years large businesses have attempted to gain access  to  these  opportunities  by  owning,  teaming  or  joint  venturing  with  small  businesses,  both innocently  and  willfully.  Congress,  to  identify  when  a  small  business  and  a  large  business  have improperly joined, has created the rules of affiliation. They are located at 13 CFR 121.103. A violation of these rules can result in a determination of Federal Fraud, both civilly and criminally.

This means that Federal  Regulations dictate the amount of ownership, control  and management a large business may have over a small business. The SBA uses the rules of affiliation to determine such issues as  Identity  of  Interests,  inter  affiliate  transactions,  common  ownership  and  control,  Common Management, Newly Organized Concern  Rule, and Successor in Interest, among other potential rules. In addition, the Totality of Circumstances, and Economic Dependence tests will apply.

Where  51%  ownership,  and  100%  Control  and  Management  MUST  be  by  a  specific  small  business category,  such  as  Service  Disabled  Veterans  or  Women  owned  small  businesses,  no  negative  controls may exist as deceitful  impediments to either the overall control, or the day to day operations of the small business.  Examples  include  hiring  and  firing,  purchase  of  all  material,  supplies  and  equipment, accounting for Federal standards (including payroll and single control for writing checks). This is not an exhaustive list, but a sample of some of the more common areas that arise in investigations.

The SBA has become quite sophisticated at analysis of company structures for this purpose, and regularly look into the affiliation issues of a company. Companies may be visited by the SBA’s Inspector General without any warning to determine if Federal fraud has occurred. These investigations may be raised by anyone, and are commonly raised by competitors as well as the SBA.

Affiliation is best defined by Case law:

“Firms are affiliated when one firm controls or has the power to control the other, or a third party controls or has the power to control both. 13 C.F.R. § 121.103(a)(1). Further, affiliation arises where 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 one or more other concerns. 13 C.F.R. § 121.103(e).

In order to find that firms are affiliated due to common management, both concerns must be controlled by the same person or persons.”  Size Appeal of US Builders Group,  SBA

No. SIZ-5519 (2013)

The  SBA  does  not  typically  monitor  small  businesses  for  size.   Most  challenges  to  size  come  from competitors  though  the  vehicle  of  a  Protest,  irrespective  of  the  authority  the  Government  Contracting Officer can individually exercise to raise a challenge.  The SBA’s Area Directors are the initial decision makers, with  possibility of appeal only to the SBA’ Office of Hearing and Appeals (OHA). These challenges are frequent.

This is a brief exert from Mr. Krause’s Article, The Rules of Affiliation – an Overview. If you would like to read the article in its entirety, you can find it in our Articles page.