Highlights
- A Final Rule from the U.S. Small Business Administration (SBA) that substantially changes the effect of recertifications of size and socioeconomic status under set-aside contracts after the merger or acquisition of a contractor will go into effect on Jan. 16, 2025.
- SBA delayed the effectiveness of changes to its post-merger and acquisition (M&A) recertification rules to restricted multiple award contracts until Jan. 17, 2026, which incentivizes buyers and sellers of small business contractors with restricted multiple award contracts (MACs) to complete transactions before the delayed effective date.
- This Holland & Knight alert examines the Final Rule and how it may affect entities subject to its requirements.
The U.S. Small Business Administration (SBA) on Dec. 17, 2024, issued a Final Rule that substantially changes the effect of recertifications of size and socioeconomic status under set-aside contracts following the merger or acquisition of a contractor. The final rule becomes effective on Jan. 16, 2025.
Regarding the effect of post-merger and acquisition (M&A) recertifications on future size eligibility, the Final Rule mirrors in many respects the proposed rule (as previously summarized by Holland & Knight) but with several important modifications in response to industry comments. In perhaps the most significant adjustment made in the Final Rule, SBA delayed the effectiveness of changes to its post-M&A recertification rules to restricted multiple award contracts (MACs) (i.e., set-aside MACs) until Jan. 17, 2026. This delayed effectiveness creates a climate in which buyers and sellers of small business contractors with restricted MACs are incentivized to complete transactions before the delayed effective date, setting up what may be an especially active year in M&A activity involving government contractors.
Below, we highlight a few of the most impactful changes SBA made in its final rulemaking on the topic of post-M&A recertifications. (Holland & Knight will issue subsequent blog posts addressing changes SBA made in other areas of its government contracting-related programs.)
The Final Rule Does Not Affect M&A Transactions That Closed Before Its Effective Date
Many in industry were concerned about how the Proposed Rule would be applied to contractors who were acquired and made post-M&A recertifications as "other than small" (i.e., "large") prior to the Final Rule's effective date. SBA helpfully clarified the prospective (future) application of its Final Rule in a way that exempts its application to M&A transactions that occurred prior to Jan. 16, 2025, and, with respect to set-aside MACs and options under long-term contracts, prior to Jan. 17, 2026.
SBA's Final Rule acknowledges it received comments noting industry concern with a potential retroactive application of the rule for pending transactions. The Final Rule acknowledges that it makes sense to allow business concerns some time to adapt and plan how best to comply with the recertification provisions and definitively states that the Final Rule is not retroactive.
This is a marked shift from past SBA regulatory regime changes such as how SBA applied and enforced its November 2020 rulemaking.
It is important to understand that the touchstone for application of the Final Rule to post-M&A recertifications is the date of the post-M&A recertification (which is required within 30 calendar days of a transaction that results in a change in controlling interest).1 A post-M&A recertification addresses the size of the acquired concern, acquiring concern and affiliates of both as of the date the transaction occurred. The version of SBA's regulations in effect on that date govern the effect of that particular recertification on future eligibility for orders and options (with the exception of the specific types of contracts subject to the one-year delay in effectiveness, as discussed below). This means that SBA's regulations in effect prior to Jan. 16, 2025, will continue to determine the effect of post-M&A recertifications made in regard to transactions that occurred before that date.
Notably, SBA states that the Final Rule will apply to existing contracts. However, SBA conclusively states that "the provisions making firms ineligible for orders or options after disqualifying recertifications will apply only to future disqualifying recertifications" – i.e., disqualifying recertifications that occur one year after the effective date of the rule. (emphasis added) "Firms that have made or will continue to make disqualifying recertifications prior to one year after the effective date of this rule will continue to be eligible to receive orders and options after the effective date of this rule." (emphasis added)
Practically, this means that contractors involved in M&A activity are operating under the current regulatory regime for recertifications until Jan. 16, 2025. The current regulations will continue to apply to post-M&A recertifications from transactions that closed while these rules were in effect (before Jan. 16, 2025). As such, the Final Rule effectively "grandfathers" recertifications from M&A transactions that closed prior to its effective date (and for an additional year for restricted MACs, as discussed in more detail below).
Changes in the Impact of Post-M&A Recertifications on Restricted MACs Are Postponed Until Jan. 17, 2026
As we previously reported, SBA is revising its regulations to change the impact of a post-M&A recertification as "large" on a contractor's eligibility for future orders and ordering periods under restricted MACs. This change significantly diminishes small business task order revenue that can be earned by a concern when a transaction results in its recertification as "large."
However, the Final Rule significantly pushes forward in time the impact of a post-M&A certification for options and orders under restricted MACs and allows companies to make a disqualifying recertification prior to Jan. 17, 2026. However, the agency cannot count those orders or options toward its small business and socioeconomic goals. After Jan. 17, 2026, if contractor recertifies as other than small following a M&A transaction, it will not be eligible for future set-aside task orders under restricted MACs.
This delayed effective date creates a climate that incentivizes M&A involving small business sellers who hold restricted MACs throughout 2025 until the new rule takes delayed effect on Jan. 17, 2026. If a M&A transaction occurs prior to Jan. 17, 2026, the effect of a post-M&A recertification as "large" will not disrupt the concern's eligibility for future task orders and ordering periods under a restricted MAC. This means small businesses holding such contracts can assert they are more valuable if a transaction occurs before Jan. 17, 2026, as opposed to on or after that date. The result should be a busy year ahead for acquisitions of government contractors holding restricted MACs with remaining ordering periods.
Exemption for M&A Transactions Between Two Small Businesses
In further response to comments, the Final Rule also amends which business concerns will be ineligible for orders and options after a disqualifying recertification due to merger, acquisition or sale. Specifically, the Final Rule creates an exemption for transactions that occur between two small businesses.
That is, though a disqualifying recertification involving a merger, acquisition or sale with a large business will result in ineligibility, where two business concerns individually qualify as small before a merger, acquisition or sale but do not in the aggregate after such occurrence, the Final Rule allows the contract holder to remain eligible for orders issued under an underlying small business MAC.
Single-Award Set-Aside Contracts
Under the Final Rule, when a concern represents itself as "large" post-transaction, the concern is eligible to continue performing on a restricted single-award contract. Additionally, post-transaction, the concern may have options exercised and receive orders as well.
No Future Restricted Orders Under FSS Contracts Following a Disqualifying Representation Post-M&A Transaction
Significantly, Federal Supply Schedule (FSS) Multiple Award Schedule (MAS) contracts are not subject to the one-year delayed effect that SBA granted to restricted MACs.
Initial eligibility for restricted orders under U.S. General Services Administration (GSA) FSS MAS contracts (i.e., before any disqualifying recertification) remains unchanged by SBA's rulemaking. Prior to a post-M&A disqualifying recertification, "size is determined as of the date the business concern submits its initial offer, which includes price, for the GSA FSS MAS contract," unless the contracting officer expressly requests a size representation specific to a particular set-aside order. 13 C.F.R. § 121.404(c)(4)(i); see also FAR 8.405-5. Although some commentators encouraged SBA to finally treat set-aside orders under FSS MAS contracts like set-aside orders under other unrestricted MACs, SBA declined. SBA noted that initial small business eligibility for set-aside orders under the FSS MAS contract are within the purview of GSA: "GSA has the statutory authority to establish FSS contracts and the procedures used to order under them."
However, post-M&A disqualifying recertificationsdo impact eligibility for future set-aside orders under a FSS MAS contract. In a separate exception under 13 C.F.R. § 121.404(c)(4), SBA stated, "[s]ize is determined on the date of recertification when a recertification is required pursuant to §§ 125.12(a) and (b) of this chapter, or on the date of initial offer which includes price if requested by a contracting officer pursuant to § 125.12(c). This exception applies to all provisions of §§ 121.404(a), (b), (c), and (d)." (emphasis added) Though exceptions to regulations that are listed consecutively under the same subsection do not generally create exceptions to each other, SBA's language that the exception regarding disqualifying recertifications at § 121.404(c)(4)(iii) applies to "all provisions" of §§ 121.404(c) indicates SBA's intent to apply the post-M&A disqualifying recertification rules to orders and blanket purchase agreements (BPAs) to be placed under the GSA FSS MAS.
This is an important change that limits post-M&A eligibility for set-aside orders under FSS MAS contracts. For post-M&A recertifications regarding transactions that closed prior to Jan. 16, 2025, a recertification as "large" did not change a concern's eligibility for set-aside FSS MAS orders as long as it had represented itself as "small" at the time of its current five-year ordering period and the contracting officer did not request an order-specific size recertification. This meant that a former small business could continue to bid on FSS MAS set-aside orders after an M&A transaction that changed their size status for other types of contracts. Now, however, a post-M&A recertification as "large" has the same effect on eligibility for set-aside orders as other unrestricted MACs – that is, a former small business is no longer eligible because its size is determined on the date quotations are submitted for the set-aside order in question rather than at the FSS MAS contract level. Again, this new rule takes effect on Jan. 16, 2025, and is not subject to the one-year delay. If an M&A transaction closes on or after Jan. 16, 2025, and results in a disqualifying recertification, the FSS MAS contract holder will no longer be eligible for set-aside orders issued under the FSS MAS contract.
Loss of Eligibility Under Pending Proposals for Set-Aside or Reserved Contracts and Orders
Notably, this aspect of SBA's Final Rule is also not subject to the delayed effective date that applies to future eligibility for task orders and options under restricted MACs.
The Final Rule clarifies the effect of a disqualifying recertification that occurs after an offer/proposal is submitted but prior to award. This new rule extends the disqualifying effect of a post-M&A recertification as "large" to task orders under restricted MACs. For an award set aside or reserved for small business or other socioeconomic program, a concern must recertify its size (and where relevant, its socioeconomic status) if a merger, sale or acquisition occurs after an offer is submitted, but prior to award.
If the concern submits a disqualifying recertification, it may or may not be eligible for the award depending on when the sale, merger or acquisition occurred.
If the merger, sale or acquisition occurs within 180 days of offer submission and before award, the concern is ineligible for the award and the concern must notify the contracting officer of the change in its size or status.
If the merger, sale or acquisition occurs more than 180 days after the date of its offer and before award, the concern is eligible to receive a pending single award or reserve, and the award will count as an award to a small business or small business program participant for goaling purposes for up to five years from the date of the award, unless there is a disqualifying recertification. However, where the pending offer/proposal is for a set-aside MAC, then the concern is ineligible for the pending award because the concern would not be eligible for forthcoming set-aside orders.
Notably, SBA did not grant a one-year delay in the effectiveness of this new regulation on pending proposals for orders under restricted MACs. This is because the delayed effect set forth at 13 C.F.R. § 121.404(g) applies only to subsection (e)(2)(ii)(B) (award of future orders under restricted MACs) and subsection (e)(2)(iii)(B) (exercise of options). However, SBA did not apply its delayed effective date to the impact of a disqualifying recertification on pending proposals is set forth in subsection (e)(2)(i).
Authorization of New Avenues to Challenge an Awardee's Size in Connection with a MAC Size Recertification
The current regulations do not specifically authorize a protest or a request for a formal size determination in connection with a size recertification. Additionally, no mechanism exists to allow a protest or request for a formal size determination from another interested small business concern who believes that a size recertification is incorrect. For example, currently on a MAC, if a concern recertifies itself to be small post-transaction, another contract holder on that MAC cannot challenge that recertification.
The Final Rule significantly changes this landscape. On Jan. 16, 2025, once the Final Rule becomes effective, any MAC contract holder may file a size protest of another MAC contract holder following recertifications required by the new 13 C.F.R. § 125.122 relating to that MAC (in addition to the contracting officer, the relevant SBA program manager relating to the contract at issue or the Associate General Counsel for Procurement Law).
Additionally, the Final Rule provides that as of Jan. 16, 2025, any contract holder on that MAC may also request a formal size determination concerning a recertifying concern's status as a small business. The Final Rule directs SBA to undertake the investigation and issue a formal determination as long as the request is sufficiently specific. Notably (and unfortunately), the Final Rule does not have a time limit on this request (something SBA will likely need to address down the road). As a result, presumably a competitor can utilize this to challenge another MAC holder's eligibility at any time, which easily foreshadows an increase in size and status challenges (and litigation) as a result.
Conclusion
The Final Rule changes the M&A landscape for government contractors and private equity investors operating in the small business space and foreshadows the potential for a busy M&A season in 2025 as contractors race to take advantage of the one-year grace period for disqualifying recertifications before Jan. 17, 2026.
For questions related to navigating this dynamic, new and complex regulatory environment, please contact the authors.
Footnotes
1 Notably, the Final Rule eliminated the requirement for recertifications in response to agreements in principle, as it had originally proposed in August 2024.
2 Under 13 C.F.R. § 125.12, triggering recertification events include 1) a merger, acquisition, or sale of or by a concern or an affiliate of the concern, which results in a change in controlling interest, 2) an express request by the contracting officer for recertification in connection with a particular order or contract, and 3) the fifth year of a long-term contract.
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