SBA proposes to change two key size standard calculations – JD Supra | Region & Cash

The Small Business Administration (SBA) recently issued a proposed rule that would change the standard calculations for two sizes. First, the SBA proposes using a 24-month period instead of the current 12-month period for calculating employees under employee-based size standards. Second, the proposed rule would allow companies in SBA loan programs to use a 5-year average or a 3-year average when calculating average annual revenue (AAR). Comments on these proposals are due by December 2, 2021. Below are important details about the changes proposed by SBA and their expected impact on small and medium-sized businesses.

Employee-related size calculation

Many small businesses operate in industries that have employee-based size standards. To determine a small business’s status under an employee-based size standard, the SBA currently uses the average number of employees at the business in each pay period over the preceding 12 months. Section 863 of the National Defense Authorization Act (NDAA) of 2021 amended the Small Business Act to extend the measurement period from 12 months to 24 months. According to the NDAA, the change from 12 to 24 months will take effect on January 1, 2022. SBA is now proposing to implement this change in 13 CFR §§ 121.106, 121.903, but SBA’s final rule is unlikely to take effect until January 1, 2022. Based on wording in the 2021 NDAA, the change does occur 24 months expected to be effective as of January 1, 2022, notwithstanding the SBA’s lack of a final rule, although the SBA may disagree with that interpretation.

While the NDAA’s change to a 24-month calculation was intended to cover only manufacturing, the SBA’s proposed change would apply to all employee-based size standards, including those for non-manufacturers. This means that non-manufacturers, subject to a size standard of 500 employees, would also be assessed after the 24-month period. We think it makes sense for the SBA to use the same 24-month period to assess the small business status of manufacturers and non-manufacturers.

Changing the period from 12 months to 24 months for employee-based sizing calculations would allow some businesses that have outgrown their small business size standard to regain their small business status. However, this assumes that the company had fewer employees in months 13-24 than in months 1-12. For companies with a declining workforce, moving to a 24-month average could see them lose small business status , if they had been small below the current 12-month moving average. When the SBA made a similar change to revenue-based sizing standards a few years ago, increasing the measurement period from 3 to 5 years, the SBA introduced a 2-year grace period during which companies had the option of using the 3- or 5-year period to use . SBA has not proposed a comparable grace period for changing employee-based size standards from 12 months to 24 months. We believe that the SBA should introduce a grace period in the final rule to minimize the adverse impact on small businesses with declining workforces.

Calculation of the average annual income

On December 5, 2019, the SBA issued final rule implementing the Small Business Runway Extension Act of 2018 (SBREA) for all SBA loan programs except for the SBA business loan and disaster loan programs, which include but are not limited to the 7(a) loan belongs to Program and Economic Damage Catastrophe Loans.

The rule proposed by the SBA aims to extend the SBREA to the SBA business loan and catastrophe loan programs by allowing companies to calculate their AAR-based size using either a 3-year average or a 5-year average . Under the proposed rule, applicants would be eligible if their 5-year AAR is equal to or less than the applicable size standard, even if they would otherwise be ineligible below their 3-year average. Under the proposed rule, this election would last indefinitely and no transitional period has been proposed. In addition, the SBA is seeking to apply this annual revenue calculation to companies seeking admission to the Small Business Investment Company program.

If companies could choose between a 5-year and a 3-year calculation, more companies would be entitled to assistance in using their annual activity report to determine the size. Unlike the proposed change to employee-based sizing, this proposal would give companies the option to choose the 3- or 5-year moving average, increasing the number of companies that can be considered small.

Special thanks to Law Clerk, Daniel Figuenick, for his assistance with this post.

Author: Amine

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