On June 24, 2019, the Small Business Administration (SBA) issued a proposed rule and requested comments on its plan to modify the method for measuring compliance with receipt-based size standards. The rule proposes to determine receipt-based sizes for businesses based on average receipts over a five-year period, rather than the three-year period currently in place. This change would upend a practice that the SBA has followed for over 60 years and carries out the intent of the Small Business Runway Extension Act (“Runway Extension Act”), which became law on December 17, 2018.

When Will This Change Become Effective and What Will It Impact?

The SBA notes that the proposed rule will “only affect the application of SBA’s size standard rules after the effective date of a final rule.” Thus, until the effective date of a final rule, SBA will continue to use average receipts over a three-year period to determine a company’s size status. More specifically, because the SBA determines size as of the date when a firm certifies compliance with the size standard in its proposal, the three-year averaging period will continue to apply to any proposal submitted prior to the effective date of the final rule. So, “even if SBA receives a request for a size determination or size appeal after the effective date of the final rule, SBA will still use a three-year calculation period if the determination or appeal relates to a certification submitted prior to the final rule’s effective date.”

The SBA expects this change to impact both small and large businesses. In particular, the SBA believes that it could enable some large firms to gain small business status and permit some “advanced” small firms to remain small businesses for a longer period of time. At the same time, the rule, if adopted, will result in some small firms losing their small business status or shorten the time that certain small firms can qualify as small. SBA estimates that the number of firms that this proposed rule benefits will greatly exceed the number of firms that it will hurt.

Proposal Addressing Segregable Divisions

The rule also includes a proposal to begin treating sales or acquisitions of “segregable divisions” differently from sales or acquisitions of “subsidiaries,”[1] when calculating compliance with a receipts-based size standard. Specifically, the SBA plans to avoid adjusting the annual receipts of a concern “where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certified as small.” The SBA acknowledges that businesses can easily avoid the impacts of this change by requiring a seller to move assets into a separate subsidiary prior to any transaction. But as the SBA explains, it still considers this change to be necessary due to the “important distinction between a division and a separate legal entity.”

Comments Sought

The SBA’s deadline for submitting comments on the proposed rule is August 23, 2019. SBA requests feedback on whether it should calculate size based on annual average receipts over five years for all industries subject to receipts-based size standards, or on whether it should only use a five-year annual receipts average to determine the size of businesses in services industries and continue using a three-year annual average period for other businesses. The SBA also invites input on how the use of annual average receipts over five years rather than three will impact both smaller small businesses and more advanced, larger small businesses in terms of their getting access to federal opportunities for small businesses. Finally, the SBA requests comments on its proposal for segregable divisions.