Small Business Size and Affiliation KMP and LBP Presentation 12Dec2023.pdf

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Shane J. McCall
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Small Business Size and Affiliation
Small Business Size and Affiliation
December 12, 2023
December 12, 2023
Robert E. Jones
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Robert@LeftBrainPro.com

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Shane J. McCall
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The Presenters
The Presenters
ROBERT E. JONES
Equity Partner
Koprince McCall Pottroff LLC
Robert E. Jones
614-556-4415
President, Principal
Left Brain Professionals
President, Principal

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
785-200-8919
Presentation Overview
Presentation Overview
What Is A Small Business?
Determining Your Business’s Size
Affiliation
Size Related Protests
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
POLL QUESTION 1
POLL QUESTION 1
How confident are you with your current size
determination?
a. Not confident
b. Little confident
c. Somewhat confident
d. Very confident
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Size Standards
Size Standards
• Size must fall under the standard for the NAICS code
assigned to the procurement.
– NAICS codes established by the Census Bureau for all
industries
• E.g. NAICS code 541330 (Engineering Services): “This industry
comprises establishments primarily engaged in applying physical
laws and principles of engineering in the design, development, and
utilization of machines, materials, instruments, structures,
processes, and systems.”
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
Size Standards
Size Standards
• SBA creates size standards for each NAICS code
– Revenue-based
• NAICS code 541330 = $25.5 million size standard
– Employee-based
• NAICS code 332216 (Saw Blade and Handtool Manufacturing)
= 750-employee size standard.
– Manufacturing generally uses employee numbers, other
industries generally use revenue.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
General Size Issues
General Size Issues
• Timing
– SBA determines a firm’s size as of the date the firm submits
its initial offer with price.
• A firm that is small when it submits its initial offer with
price is small for the life of the contract up to 5 years.
– This includes multiple-award contracts, unless the CO
requests a size recertification in connection with a specific
order.
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
Revenue-Based Size Standard
• Average annual receipts for the last five complete fiscal years
• Annual receipts = total income + costs of goods sold
• SBA looks at tax returns and financial statements.
– Form 1120 for corporations; Form 1120S for S corporations; Form 1120, Form
1065 or Form 1040 for LLCs; Form 1065 for partnerships; Form 1040,
Schedule F for farms; Form 1040, Schedule C for other sole proprietorships)
– Can use financial statements if haven’t filed taxes
13 C.F.R. § 121.104
Robert E. Jones
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Shane J. McCall
785-200-8919
Revenue-Based Size Standard
• Very few exceptions, strictly enforced:
– Net capital gains or losses;
– Taxes collected for and remitted to a taxing authority if included in
gross or total income, such as sales or other taxes collected from
customers and excluding taxes levied on the concern or its employees;
– Proceeds from transactions between a concern and its domestic or
foreign affiliates—Interaffiliate Transactions;
– Amounts collected for another by a travel agent, real estate agent,
advertising agent, conference management service provider, freight
forwarder or customs broker.
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
Employee-based size standard
Employee-based size standard
• Average number of employees using the pay
periods for the preceding 24 months
– Employees can be those employee full-time,
part-time, or those from a temp agency
– Volunteers are not employees
– Contractors are not employees
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
POLL QUESTION 3
POLL QUESTION 3
A receipts-based size standard generally looks back
how many years?
a. 6 years
b. 1 year
c. 3 years
d. 5 years
Robert E. Jones
614-556-4415

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Shane J. McCall
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Interaffiliate Transaction
• Definition: Proceeds from transactions between a concern and its
domestic or foreign affiliates
• Example:
– SBA should not count receipts based on the payment of rental from
one affiliate to another and so those payments “should be excluded as
an interaffiliate transaction” under 13 C.F.R. § 121.104(a).
– Affiliate "generates all of its rental income by leasing its only income-
producing asset to" the protested company
Crown Moving & Storage Co., SBA No. SIZ-4872 (Nov. 7, 2007)
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Shane J. McCall
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• Providing timely documentation, too little too late:
– Company did not timely raise issue regarding management fees during size review.
– Dollar amounts of management fees may have been on tax returns, but not obvious
to Area Office that the company considered those fees to be interaffiliate
transactions because there was no explanation.
– Later, company provided letter from accountant asserting that income reflected on
tax returns included certain interaffiliate transactions which should have been
excluded size.
– OHA: rejected argument, found company other than small; “unrealistic and unduly
burdensome to expect that the Area Office, on its own initiative, should have
gleaned that an item labeled “management fee” on Appellant's tax returns might
constitute inter-affiliate transactions.”
Eastco Bldg. Servs., Inc., SBA No. SIZ-5437 (Jan. 18, 2013)
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
• Providing timely documentation, too little too late:
– Company did not timely raise issue regarding management fees during size review.
– Dollar amounts of management fees may have been on tax returns, but not obvious to
Area Office that the company considered those fees to be interaffiliate transactions
because there was no explanation.
– Later, company provided letter from accountant asserting that income reflected on tax
returns included certain interaffiliate transactions which should have been excluded size.
– OHA: rejected argument, found company other than small; “unrealistic and unduly
burdensome to expect that the Area Office, on its own initiative, should have gleaned that
an item labeled “management fee” on Appellant's tax returns might constitute inter-
affiliate transactions.”
Eastco Bldg. Servs., Inc., SBA No. SIZ-5437 (Jan. 18, 2013)
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
• Must provide accounting explanation and
documentation
– Company “made no mention of CCM or PCM accounting methods,
and provided no information as to how the choice of accounting
method might have altered the claimed inter-affiliate transactions.”
– “when claiming inter-affiliate transactions, a concern is responsible
for submitting evidence of such transactions, and the transactions
must be properly documented.”
Serviam Constr., LLC, SBA No. SIZ-5872, 2017 (Dec. 4, 2017)
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
POLL QUESTION 4
POLL QUESTION 4
True or false, to claim an exception for interaffiliate
transactions, a company must provide accounting
explanation and documentation to show the interaffiliate
transactions.
a. True
b. False
Robert E. Jones
614-556-4415

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Shane J. McCall
785-200-8919
JV Receipts
• Must include “proportionate share” of JV receipts.
– Receipts: proportionate share is equal to percentage share of work
performed by the joint venture partner.
• Doesn’t include transactions between JV and JV partners already included in tax
return.
– Employees:
• “concern must include in its total number of employees its proportionate share of
individuals employed by the joint venture.”
• Same percentage of employees as JV partner's percentage ownership in the JV, after
first subtracting any joint venture employee already accounted for in one of the
partner's employee counts.
13 C.F.R. § 121.103
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
JV Receipts
• JV proportionate share rule only applies to a “joint
venture” as defined under section 121.103(h).
– 121.103(h) is an SBA-defined JV, not defined under state law.
Swift & Staley, Inc. SBA No. SIZ-6125, 2021 (Nov. 1, 2021).
• To not include JV receipts, must demonstrate that
proportionate share of JV receipts were already reflected
on tax returns and numbers must match.
– GC&V Constr., LLC, SBA No. SIZ-6236, 2023 (Aug. 11, 2023)
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
POLL QUESTION 5
POLL QUESTION 5
What share of joint venture receipts must be included in a
company’s receipts for size purposes?
a. None
b. All
c. Proportionate
d. Aggregate
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
Affiliation
Affiliation
Robert E. Jones
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Shane J. McCall
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What Is Affiliation?
What Is Affiliation?
Big Picture
Big Picture
• If two businesses are affiliated, SBA believes they are so
closely related that it imputes the size of one to the other.
• The touchstone of affiliation is control—i.e., one firm has
the power (positive or negative) to control the other.
• Affiliation does not automatically make you ineligible for
set-asides, it depends on how it impacts your size.
– For two very small businesses that combined would still be under
the size standard, affiliation might not be a big deal.
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
Bases For Affiliation
Affiliation Rules
Affiliation Rules
• Common ownership
– If a person owns 50% (or more) of two businesses, those two business are automatically
affiliated.
– Large minority owners are presumed to control a business if there is no majority owner.
• Lots of small owners and none much larger than the other, like a publicly-traded company? Board
of Directors and CEO/President control unless evidence shows otherwise
• Present effect rule
– Stock options, convertible securities, and agreements to merge can be considered already
exercised
• Negative control
– Corporate documents
– Exception for extraordinary circumstances
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
785-200-8919
Identity of Interest Affiliation Rules
Identity of Interest Affiliation Rules
• Business interests shared by family members
– Firms controlled by immediate family members are presumed affiliated if they do
business with each other.
• Can be rebutted if you show “clear line of fracture.”
• Economic dependence
– Gains 70% of receipts from another business over the previous 3 fiscal years
• Rebuttable if you can show that you are such a new business that you haven’t developed your
customer base enough yet or that you are perfectly able to provide to other businesses.
• Common investments
– Individuals or firms that share 2 or more common investments that are substantial to
both.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
785-200-8919
Affiliation Rules
Affiliation Rules
• Common management
– Officers/directors of multiple firms
• Newly organized concern
– Former owners/officers organize a new firm in the
same industry and their old firm furnishes the new
firm with contracts or other assistance.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Affiliation Rules
Affiliation Rules
• Totality of the circumstances
– Firms may be affiliated even if no single factor is sufficient to
constitute affiliation.
• Shared facilities or resources
• Common employees
• Bonding assistance
– Simply put, the more connections, the more likely there’s
affiliation.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
POLL QUESTION 2
POLL QUESTION 2
Which of these is not a type of affiliation under
SBA’s rules?
a. Common ownership
b. Affiliation based on similar entity name
c. Common management
d. Family member affiliation
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
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Affiliation Examples
Example
– SmallCo own 90% of Company A.
– SmallCo also own 50% of Company B.
• Company A and B are affiliated by common ownership.
• SmallCo would be affiliated with A and B as well
Robert E. Jones
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Shane J. McCall
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Example
Example
– You own 100% of Company A. You also own 25% of Company
B allow with 3 other owners that own 25% of Company B.
– You control Company A and you are presumed to control
Company B. So Company A and Company are presumed
affiliated.
• All four have roughly equal ownership and the individual interests
are fairly large.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
785-200-8919
Example
Example
• Identity of interest
– Jack owns 100% of Company A.
– Jack’s mother owns 100% of Company B.
– Company A and Company B do some business with each other.
– The companies are presumed affiliated.
• Need to show clear line of fracture to get around.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Example
• Identity of interest
– Company A derived 75% of its receipts, for the past
five years, from Company B.
– Company A is presumed affiliated with Company B.
• Again, can get around if circumstances are right.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Joint Venture Affiliation
Joint Venture
Joint Venture
• Normally, joint venturers are automatically affiliated with each other.
• Exceptions
– Two or more small businesses may submit an offer as a joint venture if
each is small under the assigned NAICS code.
– Joint ventures consisting of a mentor and protégé are shielded from
affiliation, if the protégé under the assigned NAICS code.
– BE AWARE: If other grounds for affiliation exist, can still be found
affiliated for those reasons!
• Two-Year Rule
Robert E. Jones
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Shane J. McCall
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Example
Example
A JV is awarded its first contract on November 15, 2021. The JV
submits several other bids but does not win any more work. On
December 1, 2023, the JV partners see another bid that they would
like to bid on using the JV.
More than two years have passed since the JV was awarded its first
contract. If the JV submits a proposal, the JV partners could be
deemed generally affiliated.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Ostensible Subcontractor Affiliation
What Is It?
What Is It?
• For a set-aside contract, a prime contractor
is affiliated with its subcontractor if:
– The prime is unusually reliant on the
subcontractor or
– The subcontractor will perform the primary
and vital requirements of the contract.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Ostensible Subcontractor
Ostensible Subcontractor
• Contract specific
– SBA looks at the totality of the circumstances based on the
relationship
• There are risks factors that make ostensible
subcontractor affiliation more probable.
• Primary and Vital and Unduly Reliant on subcontractor
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
New Rule?
New Rule?
• Rule change in April 2023 appears to alter how to
analyze ostensible subcontractor affiliation.
– SBA will not find that the primary and vital requirements are
being performed by the subcontractor, or that the prime
contractor is unusually reliant on the subcontractor, if
– Prime contractor can “demonstrate that it, together with any
subcontractors that qualify as small businesses, will meet the
limitations on subcontracting” found in 13 C.F.R. § 125.6.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
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Shane J. McCall
785-200-8919
Avoiding Affiliation
Avoiding Affiliation
Dealing with Affiliation
Dealing with Affiliation
• Recognize risks
– Audit size and affiliation issues before your firm’s size is
protested.
– Talk to accountant and attorney for keeping track of risks
• Affiliation isn’t a permanent condition
• Many presumptions are rebuttable
– Clear line of fracture
– Mentor-protégé agreement with affiliate
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Protests/Appeals to SBA
Protests and Appeals
Protests and Appeals
• SBA entertains protests/appeals challenging:
– NAICS code designation
– Small business size status
– Socioeconomic status
• Size can be challenged by the CO, SBA, or other
interested parties (e.g., other offerors).
Robert E. Jones
614-556-4415

www.koprince.com
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Shane J. McCall
785-200-8919
Fast deadlines
Fast deadlines
• NAICS Appeal
– Must be filed within 10 days after solicitation is issued (or
amendment that changes the NAICS code if such is the case)
• Size/status protests
– Protests due within 5 days of award notification
– Protested concern will have a few days to respond
– Final decisions (some) subject to appeal at SBA’s Office of Hearings
and Appeals
• Have to appeal within 15 days of size determination by SBA area office.
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
Protest/Appeals to SBA
Protest/Appeals to SBA
Size Protests
Size Protests
• Protests are an important part of the
procurement process
• Seek help
– Fact and document intensive
– Nuanced regulations and procedures
• Act quickly
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
POLL QUESTION 6
POLL QUESTION 6
How much help do you need with your size
determination?
a. A lot of help – I am confused
b. Some help – I have some idea
c. A little help – I think I am on track
d. None – I’m good to go!
Robert E. Jones
614-556-4415

www.koprince.com
www.smallgovcon.com
Twitter@smallgovcon
Shane J. McCall
785-200-8919
GovCon Handbooks
GovCon Handbooks Available on
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GovCon Handbooks
GovCon Handbooks Available on
Amazon.com
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Robert E. Jones
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