Risk & Compliance

How Big Is Small?

For the first time in 25 years, the Small Business Administration is taking a comprehensive look at what qualifies a business as “small,” unleashin...
Marielle SegarraAugust 30, 2011

What makes a business small is a matter of some debate, with legislators, software vendors, and corporate executives each applying their own filters, depending on the situation. Now the Small Business Administration itself is stepping into those waters, as it wades through its first comprehensive review of small-business size standards since the 1980s. The effort is likely to expand the definition of small to include more firms, but not without some pain.

“Our objective is to help small businesses grow, become competitive, and then exceed the size standard and be on their own,” says Khem Sharma, the SBA size standards chief. However, across the board, the new size standards will define more businesses as small. One of the most recent proposals, if finalized, would make up to 9,450 additional companies eligible for SBA assistance.

The SBA size criteria vary from industry to industry, but generally hinge on a business’s annual receipts (a metric derived from revenues) or the number of employees it has. The measures are fraught with significance for companies, since they are used to determine which are eligible for government-backed loans, business-development programs, and preference on federal contracts.

Over the years, the SBA has adjusted its revenue-based standards for inflation, and on an ad-hoc basis. This review, which started in 2007, will instead consider each of the 1,000-plus industries covered by the government’s North American Industry Classification System.

So far, the SBA has issued final decisions on 3 out of 20 broad sectors, raising revenue limits for 69 industries within those sectors (see chart below for more detail). It has also proposed new standards for two other sectors: the professional, scientific, and technical services sector and the transportation and warehousing sector. In some cases, it has left the standards as they were; in no case yet has the SBA lowered a size limit. Progress is slow, given the barrage of conflicting comments most proposals elicit. Although many companies support revising the size limits, few agree on where to set the bar.

Take one set of standards under revision: the revenues (or annual receipts) limit for the architectural services industry. During the comment period, many small-business owners wrote to say that increasing the limit from the current $4.5 million to the proposed $19 million would devastate the smallest companies by allowing larger businesses to knock them out of competition for federal contracts. Raising the standard to $19 million would include almost all firms in the industry, running “counter to the purpose of small business set-asides,” wrote Steven Wise, principal at 23-person firm SFS Architecture, in a public comment. Although Wise supported an increase, he believes one as large as the one proposed would have far-reaching effects, “directly impacting [his firm’s] ability to maintain personnel levels and secure new projects.”

Larger architectural firms plead a different case, with many also saying jobs are at risk. They note that annual receipts, which include cost of goods sold, do not always reflect size. Increasingly, for instance, some architectural firms need to pay engineering and technical consultants to help them build complex, energy-efficient buildings. Since subcontractor costs are added to receipts, these companies may look larger than they are, wrote Jon Molloy, principal at 38-person architectural firm BTA. Increasing the standard to proposed levels would help companies like BTA avoid layoffs, he wrote.

A similar debate is happening across industries. Wherever the SBA places the threshold, it’s hard to make everyone happy. Indeed, some small-business owners seem to recognize this trend; often “the game is to set the limit so you are just under and the other guy is just over,” wrote Tom Lagos of construction firm LSV Inc. in a public comment to the SBA.

Such debates will not likely end soon. The SBA has many more standards to reevaluate, and according to the 2010 Small Business Jobs Act, it will have to conduct a comprehensive review every five years. Next time around, the SBA may lower size standards if it finds that raising the standards has shifted contracts to “larger small businesses, hurting the small businesses. . .because [they’re] not getting their fair share,” says Sharma.

One bright point: comments from executives can be influential. As an example, last year the SBA took companies’ advice to change the size limit for new car dealers from revenue-based to employee-based. To read more or comment on potential changes in your industry, click here for more information.