Government Contractor M&A Alert: SBA Increases Small Business Size Standards

The following blog post from SC&H Group discusses the Small Business Administration’s (SBA) recent increase in size standards for manufacturers and wholesale traders, opening greater opportunities for government contractors to explore strategic M&A activity.

To reflect recent changes in the economy and Federal contracting marketplace, the SBA has announced a series of updates to small business size standards. Key among these are increases in the standards for three North American Industry Classification System (NAICS) Sectors:

Examples of Updates to Manufacturing and Trade Size Standards
The changes affect 256 industries, including 209 in manufacturing, 46 in wholesale trade, and one in retail trade. Following are just a few examples of industries that have been affected, along with their corresponding NAICS code and previous and updated size standard.

Table 3: Summary of Size Standards Revisions in NAICS Sector 31-33

  • 336412, Aircraft Engine and Engine Parts Manufacturing, 1,000 to 1,500 employees
  • 334112, Computer Storage Device Manufacturing, 1,000 to 1,250 employees
  • 327310, Cement Manufacturing, 750 to 1,000 employees

Table 4: Summary of Proposed Size Standards Revisions for NAICS Sectors 42 and 44-45

  • 423860, Transportation Equipment and Supplies, 100 to 150 employees
  • 423430, Computer and Computer Peripheral Equipment and Software Merchants, 100 to 250 employees
  • 454310, Fuel Dealers, 50 to 100 employees

Considerations and Opportunities for Small Government Contractors
These updates have presented valuable opportunities to various contractors. For instance, some small businesses are discovering that they can pursue strategic acquisitions of other small businesses to add new capabilities and qualifications—while still maintaining their small business classification.

Meanwhile, some companies that exceeded small business thresholds are now qualifying for small business classification, making them eligible for additional contracting opportunities. In fact, the SBA estimates that 1,250 manufacturing firms and nearly 4,000 wholesale and retail trade companies have been added to the pool of small businesses because of these changes.

Finally, other small businesses are finding that they are potential targets of an acquisition, providing significant opportunities to maximize shareholder value.

Capitalizing on New Opportunities for Strategic M&A Activity
Receiving an unsolicited offer or entering into a M&A process are complicated transactions that require knowledge of the capital markets, complex accounting rules, tax legislation, and clarity of cash flows. Therefore, small businesses that may be targets of an acquisition should closely examine how to best benefit from these updates.

Through consultation with valuation and M&A specialists, small businesses can determine the right time to complete a transaction, the right process to achieve shareholder objectives, and the company’s value and potential areas of concern to buyers. Valuation services may entail allocating, recording, and testing goodwill and asset impairments, as well as appraising machinery equipment, assessing the value of intellectual property, allocating purchase price, and more.

Ultimately, SBA’s updated small business size standards are opening greater opportunities to explore strategic acquisitions and liquidity options. Government contractors that take steps now to prepare will be best positioned to optimize their transaction outcomes and attain their key short- and long-term objectives.

To understand how SBA’s size standard updates may affect your company, as well as how you can effectively capitalize on them, contact SC&H Group here.