The small-business M&A cliff should have never happened

After January 16, large businesses won't be able to win set-asides by buying smalls

Photo by Kevin Chen on Unsplash

Small businesses have one more day before the “M&A cliff,” the date that SBA set for changing the mergers-and-acquisitions rules. After that, mergers between a small business and a large business make the firm ineligible for new competitive set-aside awards, including task orders.¹

The M&A cliff should have never happened.

Instead, SBA should have been clear all along about what happens when a large business acquires a small one. I bear some of the responsibility for that, since I was in charge of SBA regulations for most of this decade. But I’m glad that SBA provided the certainty that companies need to predict what will happen with their contracts. And, in the process, SBA also created some exceptions that small businesses can use to make themselves more attractive acquisition targets.

That said, I’m still shocked by how divergent the inside view of SBA’s regulations—the one that I held while the policy director there—was from the view on the outside. Before the change, Steve Ramaley and Damien Specht first explained to me how private lawyers read the M&A rules. I couldn’t fathom that anyone could read the regulations that way. And then I discovered basically all of the private bar interpreted them the same way as Steve and Damien.

So, from a personal standpoint, the M&A cliff is a reminder of my own revelation. The inside-government perspective can be wildly different from how people in most of the world see it. You can see that phenomenon elsewhere: the 8(a) program and Category Management, to name a few. It teaches the lesson that the government folks need to make a special effort to engage with the public. Sometimes, they aren’t even speaking the same language.

OHA: SBA's policy was “completely silent”

The saga of the M&A cliff starts with the Odyssey Systems case in 2021, from SBA’s Office of Hearings and Appeals, the agency’s internal adjudicatory body. Odyssey had protested the size status of Millennium Engineering for a small-business OASIS task order. Millennium had merged with a New York-based private-equity firm, Odyssey alleged. Odyssey had found this information in the private equity firm's press release, which is a common feature in these protests.

The question for OHA turned out not to be whether Odyssey was qualified for the OASIS task order. Instead, it was whether Millennium could timely protest Odyssey’s status at the time for the task order. Initially, the SBA area office—the decisionmaker that comes before OHA—had said no. The SBA’s Office of General Counsel agreed: No, there could be no timely size protest for this task order.

OHA agreed with both the SBA area office and the general counsel’s office. OHA decided that this wasn’t one of those rare task orders that met SBA’s standard for requesting size recertification. So, as with most task orders, a size protest could not be timely.

But OHA didn’t stop there. Odyssey had insisted that a merged firm couldn’t get a task order. So, in dicta (that is, language that doesn’t affect the ultimate holding), OHA stated that Odyssey’s argument would make SBA’s then-current M&A regulation “largely meaningless.” The logic was that, because the regulation discussed the consequence of the merged firm receiving an order, SBA must be assuming that merged firms can receive orders.

That last part, about the regulation being “largely meaningless” under Odyssey’s argument, made no difference in the final outcome of the case. OHA allowed SBA to dismiss the case as untimely; the “largely meaningless” language didn’t matter. But it would come to shape the caselaw in this area in a way SBA didn’t predict.

OHA applied that “largely meaningless” language in Forward Slope, decided in 2023. The facts were simple. Forward Slope had won the Navy’s Seaport-NxG as a small business. Then it was bought by a Texas-based private-equity firm. Less than a month after that purchase, Forward Slope bid for a set-aside task order that it won.

This time, SBA itself filed the protest. SBA protests are always timely, so that got around the timeliness issue from Odyssey. Yet SBA still lost. OHA cited the “largely meaningless” language from Odyssey and ruled that Forward Slope remained a small business on Seaport-NxG. OHA allowed Forward Slope—now owned by the Texas private-equity firm—to receive the set-aside award.

The Forward Slope case caught SBA’s attention, and matters reached a head in 2024. In two cases decided just two months apart, Saalex and Lintech, SBA’s general counsel’s office argued that OHA’s ruling couldn’t possibly be right. The policy was clear: “Large companies cannot buy into small business contracting and contracts,” the counsel’s office wrote. In one of the cases, the small business had been purchased by a global consulting/technology firm.

OHA rejected the SBA counsel’s arguments in both cases. In Lintech, the judge rebuked SBA on the notion that SBA had been “clear.” The SBA rule “is almost completely silent as to any effects of a merger or acquisition,” Judge Kenneth Hyde wrote (emphasis is mine).

To OHA, that “complete silence” meant that, contrary to the SBA counsel’s policy, large businesses could, in fact, buy into small-business contracts.

A new concept fills the silence

The complete silence lasted only three months. In August 2024, SBA unveiled a wholesale rethinking of the M&A rules. The new framework at section 125.12 consolidated rules from various parts of SBA’s rules and created a new concept: the “disqualifying recertification.” The disqualifying recertification could come at the end of the fifth year in a long-term contract, or at the request of a contracting officer. But, most commonly, it would result from a merger or acquisition.

Disqualifying, of course, means that the firm cannot receive new set-aside orders. In most cases, it can’t receive options on a set-aside multiple-award contract.

Importantly, the disqualifying recertification rule applies to new work. The acquired firm can continue to perform on any work it was already awarded. And, depending on how SBA’s 180-day rule applies, the acquired firm might even be able to receive an award for work that it bid on before the transaction.

SBA also solved the timeliness issue that blocked Odyssey Systems. A new protest rule allows a competitor to file after an order award.

During the public review process, some commenters hated SBA’s new “disqualifying recertification” concept. They complained that it would hurt small businesses’ acquisition value. They thought it would discourage growth.

In response to comments, SBA made several important changes to the final rule, published in December 2024. The first was that the rule would not apply to agreements in principle. The second was that it only applies to large-with-small transactions, not small-with-small.

And the third was that it wouldn’t take effect for 13 months, which is how we ended up with the M&A cliff ending tomorrow.

What mergers and acquisitions still qualify

The new disqualifying recertification rule doesn’t cover every situation. Damien Specht, Amy Fuentes, and I went over hypothetical scenarios for an hour for an American Bar Association event. We still left with unanswered questions. What happens if the firm can move over from a small-business pool to an unrestricted pool on the multiple-award contract after the acquisition? That’s an open question.

Some general principles are clear. First, a transaction between two small businesses doesn’t have the same consequences. There’s some nuance with this: What NAICS code do you use? What if there is another recertification after the small-with-small transaction? Some of the details may need to be worked out with SBA.

Second, and related to the first point, a transaction that does not result in a change in the business’s size isn’t disqualifying. In another section of the rules, SBA defined a “qualifying recertification.” That language is easy to miss. But it also encourages mergers between smaller firms.

Third, a recertification is required for a change in “controlling interest.” But what if there isn’t a change in the controlling interest? This issue is intertwined with SBA’s affiliation rules. In the same rule change in December 2025, SBA amended the affiliation rules to allow for more access to minority investments. The “controlling interest” test is consistent with opening up that access.

The big worry with tomorrow’s cliff is that, as commenters had suggested, firms’ valuations will be hurt. For individual businesses, that might be true. But the fact that a large-business-owned firm can’t compete for small-business set-asides isn’t the whole analysis. A presently small business will win instead. So the overall effect is mostly a wash. The dip in the larger firms’ valuations is offset by higher forward-looking prospects for smaller firms. (This would not be true, by the way, if the Rule of Two applies to task orders. But the new FAR Overhaul says it doesn’t.)

Ultimately, this cliff results from a forced choice between two valid goals: higher valuations for mature small businesses, and the integrity of small-business set-asides. This was more than a policy choice, though. The bigger problem with the cliff was the ambiguity that preceded it. The regulation should never have been, as OHA suggested, “completely silent.” But the agency wasn’t speaking the same language as the practitioners, and that caused a lot of confusion. So this cliff is a reminder that clarity is as important as the policy itself.

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With 20 years of Federal legal experience, Sam Le counsels small businesses through government contracting matters, including bid protests, contract compliance, small business certifications, and procurement disputes. His website is www.samlelaw.com.

This article is for informational purposes only and does not constitute legal advice.

1. The rule actually refers to January 17, but that’s Saturday. (Specifically, the rule states that the transaction must occur “prior to” January 17.) At least it’s not a Federal holiday.