Responding to statutory requirements in the 2018 Small Business Runway Extension Act, the Small Business Administration (SBA) issued a proposed rule on June 24, 2019 to adjust its regulations on the calculation of average annual receipts in small business size determinations. This change would increase the size determination review period from three years to five years and would apply to other agencies' proposed size standards for service-industry concerns that are subject to "receipt based size standards." The proposed rule can be found here. The SBA proposed this change to "promote consistency government-wide" for size standards.
The proposed rule will change only the period over which SBA will calculate a company's average annual receipts, and will not change the SBA's method of aggregating those receipts. Now, if a company has been in business for five or more years, the SBA will calculate the company's total receipts over the five-year period and divide by five. Where a company has not been in business five years, the SBA will calculate an annualized average based on the number of weeks the company has been in business (i.e., divide the company's total receipts, divide that total by the number weeks the company has been in business, and multiply by 52).
The proposed rule also would establish a distinction between the acquisition or sale of a division and the acquisition or sale of a separate legal entity when calculating average annual revenue. The SBA's regulations exclude revenue from former affiliates sold prior to the date on which a concern's size is determined, but as of now, it is unclear if that rule would extend to sales of a division within a company. The SBA's proposed rule would clarify that it would not, reflecting SBA's position that "[a]ny receipts attributable to a specific division of a concern are certainly receipts earned by the concern." Nonetheless, the SBA acknowledges "some may feel that distinguishing the sale of a division from that of a subsidiary would elevate form over substance," and encourages industry comments on the matter.
Because size is determined as of the date of certification, the proposed rule provides that the current three-year period will apply to any certification submitted prior to the effective date of the final rule, as well as any subsequent determination or certification that relates back to a certification or a size appeal before the effective date. This proposed rule does not take effect until the end of the notice and comment period and issuance of the SBA's final rule.
Final comments are due by August 23, 2019.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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