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Skyway Insight© Webinar Training From Contracting Officers Topic: Small Business Affiliation Guide Host: Shelley Hall April 13, 2017

Agenda Small Business Affiliation Guide What is Affiliation? Red Flags Recent Changes Court Case on Affiliation Final words

Small Business Affiliation Guide

Small Business Affiliation Guide Size Matters - In order to be eligible for certain Federal programs and certain Federal contracts and subcontracts, you must be a “small business concern.” SBA’s size regulations, which are set forth at 13 CFR part 121, are used to determine eligibility for all SBA and Federal programs that require a concern to be small.

Small Business Affiliation Guide (cont’d) SBA’s size rules also apply to small business loan programs and grant programs. A number of government agencies, including the Food and Drug Administration and the Department of Veterans Affairs, operate programs for which small business status is a requirement for eligibility. The size rules apply to these programs, as well.

What is Affiliation?

What is affiliation? What is an “affiliate”? SBA determines whether an entity qualifies as a small business concern by counting its receipts, employees, or other measures including those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 13C.F.R. §121.103(a)(6). SBA has a specific set of rules that explain when another person, business or entity is considered an affiliate for size purposes.

What is affiliation? (cont’d) Where do I find SBA’s affiliation rules? SBA’s rules on affiliation for its programs (except SBIR and STTR) are found at 13 C.F.R. §121.103 (available online at http://www.ecfr.gov). For the SBIR and STTR program, SBA’s affiliation regulations can be found at 13 C.F.R. §121.702. For specific affiliation rules for the SBIR and STTR programs, go to www.sbir.gov.

What is affiliation? (cont’d) What are the general principles of affiliation? Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties

What is affiliation? (cont’d) SBA will consider the totality of the circumstances when determining whether affiliation exists and may find affiliation based on them even though no single factor alone may be sufficient to constitute affiliation. If SBA determines that affiliation exists, SBA will count the receipts, employees, or other measure of size for the concern whose size is at issue combined with the receipts, employees, or other measure of size for all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.

Red Flags

Red Flags Ownership Common Management identity of Interest (family members, economic reliance) Newly Organized Firm Joint Ventures Ostensible Subcontractors (sub performs primary req’ts, prime is unusually reliant on sub) License Agreements Totality of Circumstances

Recent Changes

Recent Changes Final Rule (May 2016) This rule amended the Small Business Administration's regulations to implement provisions of the National Defense Authorization Act of 2013, which pertain to performance requirements applicable to small business, socioeconomic program set-aside contracts, small business, and affiliation.

Recent Changes (cont’d) Changed § 121.103(f), which defines affiliation based on an identity of interest. Paragraph 121.103(f) discusses the circumstances where an identity of interest between two or more persons leads to affiliation among those persons and their interests are aggregated. SBA included additional guidance on how to analyze affiliation due to an identity of interest.

Recent Changes (cont’d) Paragraph 121.103(f)(1) includes clarification regarding the type of relationships between individuals that will create a presumption of affiliation due to an identity of interest. Language was added that a presumption of affiliation exists for firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings.

Recent Changes (cont’d) In paragraph 121.103(f)(2), SBA adopted a presumption of affiliation based on economic dependence. Specifically, if a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated. Previously there was no fixed percentage that SBA applied when evaluating this criteria.

Court Case on Affiliation

Court Case on Affiliation ProSol Associates, LLC – Size Appeal (Feb 2017) In this appeal, the SBA Office of Hearings and Appeals held that a son’s company was affiliated with a company owned by his father because the son had worked for several years at the father’s company, the son’s company leased office space from the father’s company, and the two companies engaged in significant amounts of subcontracting.

Court Case on Affiliation (cont’d) The SBA Area Office found that the father and son were presumed to have an identity of interest under the SBA’s affiliation regulations.  Although the presumption of affiliation based on an identity of interest can be rebutted by showing a clear fracture, there was no clear fracture between the two companies because of the lease and continuous subcontracting relationships.  The affiliation caused the son’s company to be ineligible for the contract (because the affiliation caused it to be a large business).

Questions

Questions What if I share an office with another SB? It depends on the nature of your agreement. What does the lease say? Do you have clearly different lines of management? How reliant are you on the other company? What if I’m working for a SB, but I start up my own SB while I still continue to work for the other SB full time? This would not definitely show an affiliation. Do the companies do the same type of business? Are you financially reliant on the company you continue to work for? Can they make business decision on how you run your company?

Questions What if another company “loans” me money or equipment so I can start my own business, get my 8a, and subcontract to them? This one sure sounds like affiliation. You are financially dependent on them (loan), you are using their assets (equipment), and you’re subcontracting to them. Better check with SBA. What if I own a business and my spouse owns a business, but we really work on both businesses? This is covered in the identity of interest. There is nothing that prohibits this but if the two companies combined bid on a contract as a small business and the affiliation makes them a large business, they would not be eligible for award.

Questions What is the pricing relationship between a large business and small business reseller (who represents/sells the large businesses product to the Gov’t)? It depends on how a contract is priced. If it is a small business set aside and the SB has to do 51% of the work, then the SB should price out that work, while the LB prices out the portion they are doing. This could effect limitations on subcontracting issues also. Bottom line is that the prime ultimately presents the pricing to the government.

Final Words

Final Words Be aware of affiliation rules If you have questions, contact the offices listed on the last two pages of the SB affiliation guide. They are the experts. As with anything in Federal contracting, find out FIRST if this is an issue, not after you have submitted a bid and another offeror has filed a size appeal challenge.

Skyway Acquisition Solutions, LLC        Shelley Hall Email: shelley.hall@skywayacquisition.com www.skywayacq.com