SBA proposes sweeping rewrite of small business size standards

The Small Business Administration is proposing a massive overhaul of the small business size standards that reworks the formulas used to determine when a business qualifies as small.

SBA published a pair of Federal Register notices on Thursday that describe the changes. The first, a notice of availability for the revised methodology, lays out how SBA will calculate size standards.

The second is a proposed rule that will apply the formulate and rewrite the size standard tables.

Both are meant to be read together with the methodology notice explaining the how and why, while the proposed rule is the regulation that will apply the methodology.

Under the new methodology, SBA says it wants to abandon the size methodology released in 2024 by the Biden Administration.

The new size standards will be based on average market size that SBA will calculate from three components – national industry size, number of distinct geographic markets, and a net import/export adjustment.

SBA is using an approach similar to how the Justice Department and Federal Trade Commission define a relevant market under their Horizontal Merger Guidelines. These are based on product market plus geographic market, according to SBA's methodology notice.

SBA also wants to use the Agriculture Department’s community zone algorithm to define whether competition is “local” or “national.”

The notice includes detailed formulas that SBA plans to use and the underlying data sources needed to complete the calculations.

Once approve, the new formulas will impact all the current size standards and will convert many size standards from receipt based to employee-based standards.

The conversion to more employee-based standards should benefit small business federal contracts.

“The act of winning a contract will not by itself force a firm to transition into a large business,” SBA wrote.

The changes will allow nearly 115,000 more businesses to claim small business status, SBA says. Many of those businesses will fall into NAICS categories of Management of Companies and Enterprises, Restaurants and Other Eating Places, and General Medical and Surgical Hospitals.

Losing small business status are the NAICS codes for Wired and Wireless Telecommunications and Waste Collection.

SBA is also adding a productivity adjustment for size standards based on receipts. Currently, SBA only adjusts receipt-based standards for inflation and the agency says that approach small businesses at a disadvantage.

“Without accounting productivity, the size standards are left with an incomplete assessment of small business size,” SBA wrote in its notice.

Comments on the proposed changes are due by Sept. 21.