The question of qualifying as a small business often considers whether an individual owns and controls her own business. While proper ownership is one type of hurdle– what do you do when you have a stake in not just one, but multiple businesses? To protect your small business status, you have to start by thinking about affiliation.
The SBA’s general rule of affiliation is that two businesses will be considered affiliates if one owns or has the ability to control the other. That sounds simple enough, but – again – the SBA has very specific ideas on what it means to own or control.
The most basic example of affiliation is Common Ownership. If the same person owns more than 50% of two businesses, those businesses are automatically considered affiliates by the SBA (and therefore must include the annual receipts and the employees from both business in all size determinations).
The work-around for purchasing an interest in another business is to become a minority owner (owning less than 50%). However, even in that case, you still need to be careful. The SBA still looks into minority interests when considering affiliation. For example, if you own 49% of a business, the SBA could still look at the “totality of the circumstances” to see if you actually control the business (even though you don’t own it outright). The tests for minority ownership occur on a sliding scale, so each business will be evaluated on a case-by-case basis.
The SBA’s Office of Hearings and Appeals (OHA) recently considered the issue of minority ownership on a small business set-aside procurement concerning the leasing of Gulfstream 550 aircraft to the government. Tenax Aerospace, LLC won the contract, but another offeror protested based on the claim that Tenax exceeded the $32.5 million size standard based on its affiliation with more than 20 other companies.
OHA’s decision focused on one claim of affiliation between Tenax and Tri-Jet LLC. Tenax and two of its investors each held equal one-third shares in Tri-Jet. Even though Tenax claimed to be a passive owner, OHA reviewed Tri-Jet’s Operating Agreement and determined it provided for the ability to exercise control.
Affiliation can be frustrating for this exact reason – even the best laid ownership plans can backfire based SBA interpretations. Here are two things that you should be thinking about if you own, or are considering investing in, a second business:
- Have affiliation in mind when you structure the deal. Operating Agreements and other corporate formation documents can be specifically structured around the SBA’s rules on affiliation – making it more likely that you’ll succeed where Tenax failed.
- If you are a small business owner with a stake in multiple businesses, conduct a self-audit now – before a protest is filed. It is much easier to take stock of affiliation issues before the SBA is involved. Once your case is under government review, its already too late to make changes.