In an effort “to promote consistency government-wide on small business size standards,” the final rule will apply this five-year measurement period to both service and non-service industries. Specifically, the rule states that “SBA is adopting a five-year averaging period for calculating the annual receipts of businesses for all industries that are subject to its receipts-based size standards, including the retail trade, agricultural, and construction industries.” This is a broader application than required by the Runway Act, which only extended the calculation period from three to five years for service providers. SBA correctly observed that “it would be confusing … for a business that is engaged in both service and non-service industries to use a five-year average for determining small business status in a service industry but switch to a three-year average for a non-service industry.”
The rule also explains the SBA’s views on its former affiliate rule, stating that “SBA believes that it is not logical to allow a firm to exclude the receipts of a former division just because that division was sold, since those receipts accrued to the concern.” SBA instructs that “there really is a difference between the sale or acquisition of a segregable division as opposed to the sale or acquisition of a separate legal entity,” explaining that “[t]he sale or acquisition of a division is not a question of affiliation. It simply represents an addition or subtraction to the concern itself. This is distinct from the sale or acquisition of a separate legal entity, which implicates questions of affiliation.” As such, the final rule clarifies that “the former affiliate rule does not permit a concern to adjust its receipts when the concern sells a segregable division that is not a separate legal entity.”
Finally, the rule makes no revisions to the SBA’s rules for employee-based size standards, which are primarily utilized in the manufacturing industries.
The final rule will become effective January 6, 2020, with a two-year transition period until January 6, 2022.