Recertification Rule Spurs Urge to Merge Industry executives predict a surge in mergers and acquisitions of small contractors before SBA’s new recertification rule takes effect June 30. “We’re already seeing it,” said Tom Peltier, a managing director of the Baltimore investment bank Stifel Nicolaus and Co. The rule will require a company to recertify its small business eligibility within 30 days after it merges or is acquired in a stock purchase. (SAA, 11/24) Until June 30, a company must recertify only if it is acquired in an asset purchase. While potential acquirers will be pushing to complete deals before the effective date, Peltier and other industry officials say the rule may depress the value of small companies because it creates uncertainty about their future revenues. The rule will require companies holding long-term contracts to recertify their small business status after five years and again every time another option is exercised. GSA already requires five-year recertification on its schedules and governmentwide acquisition contracts, but the new rule applies to all contracts of more than five years’ duration, including options. A company will not automatically lose a contract if it outgrows its size standard, but the buying agency is no longer permitted to count the contract toward its small business goals. In that case, contractors are afraid customers will decline an option and re-compete the work to find a new small business, said Stan Soloway, president of the Professional Services Council. He and Peltier spoke at a contractors’ forum in Arlington, VA, Dec. 11. Agencies might also rewrite the terms of their set-aside contracts to specify that the company loses the contract if it loses small business status. Soloway said, “It’s wait and see” how often these things will happen. And that uncertainty worries potential acquirers and merger partners, because it makes it difficult for them to predict the contractor’s future revenue stream. “The acquirer is going to take the dimmest view possible of what the effect of this rule will be, because they want to pay as little as possible,” said Robert Tompkins, counsel with the Washington law firm Patton Boggs. He spoke at a contractors’ forum in Washington Dec. 7. Investment banker Peltier said acquirers may insist on earn-outs, where the price they pay for a contractor is tied to its ability to meet future revenue goals. “I think you’re going to see a lot more contingency payments [to be] paid later on, based on specific small business contracts being re-awarded,” he said. “Buyers are going to be very, very, very concerned.” Peltier said acquirers will have to look at the quality of the services a target company is providing to the government – whether those services are unique or indispensable to the customer agency – to try to determine how likely it is that the company will retain the contract. Several federal officials who were heavily involved in writing the new rule said five-year recertification is an attempt to balance small businesses’ need to grow with the government’s need for accurate information about its purchases from small businesses. Five years “allows them to grow, which is what we want,” said Emily Murphy, chief acquisition officer of the General Services Administration. SBA had originally proposed annual recertification, but backed off in the face of widespread opposition from government and industry. The effective date of the rule was delayed until June 30 so the government’s contracting database, the Federal Procurement Data System, can be modified to handle the recertifications. Several participants in the contracting forums said SBA should increase its size standards in light of the recertification rule. The agency has been considering a revision of size standards for more than three years, but it has said it does not intend to increase them across the board. Several industry groups have proposed creating separate size standards for small businesses in federal procurement, larger than the standards for SBA lending, in recognition of the growing size of federal contracts. “I don’t think it’s going to happen anytime soon,” said John Klein, SBA associate general counsel. Frequently Asked Questions Here are some questions about SBA’s recertification rule, with answers provided by federal officials and industry experts. What is an “acquisition?” Does it necessarily mean a transfer of the majority of stock to a new owner? No. When an investor buys a minority interest in a company, the issue is control, SBA’s Klein says. SBA’s affiliation rules set out a number of tests to determine who actually controls the company. For example, Klein said, if a minority owner has veto power over the company’s business decisions, he could be considered to control the company. What happens if a small business is awarded a contract and merges or is acquired in the first year of that contract and becomes large? The business would be considered small for that fiscal year but for any other action involving the contract or a new contract, the business would be considered large, SBA said. If a company is already on a long-term contract, will it be required to recertify? Yes. The rule applies to existing contracts as well as those awarded after June 30. The contractor must recertify the next time an option is exercised. However, SBA says the rule does not affect task orders that are awarded before June 30. Does the rule affect small businesses on subcontracts? No. A subcontractor that is small at the time of award is considered small for the life of the subcontract, according to Dean Koppel, SBA assistant administrator for policy and planning. The rule allows contracting officers to request a recertification on every task order under a multiple award contract, but they are not required to do so. Will C.O.’s be given guidance on how to decide? “We’re considering it,” GSA’s Murphy said. SBA’s Koppel said the issue will probably be addressed in an amendment to the Federal Acquisition Regulation. However, if a C.O. does require a recertification, and the company is found to be large, Murphy said that will affect only the pending task order and will not be binding on other C.O.’s. They can still consider the company small without requesting a recertification. Does the rule apply to blanket purchase agreements? No, because a blanket purchase agreement is not a contract, Koppel said. However, each order under a BPA includes a NAICS code that determines whether the contractor qualifies as a small business. With six months to go before the rule takes effect, is Congress likely to overturn it? Maybe. The Senate Small Business Committee voted this year to require annual recertification and its incoming Democratic chairman, John Kerry of Massachusetts, said he thinks five years is too long. The Republican-controlled House Small Business Committee’s bill favored five-year recertification, said Alan Chvotkin, senior vice president of the Professional Service Council. He said industry groups have discussed the issue with the staff of incoming committee Chair Nydia Velazquez of New York. Neither house of Congress passed a bill to reauthorize SBA programs, leaving the issue for next year’s Democratic majority.