Affiliation is a key concept for small business owners who want to qualify for federal contracts and programs administered by the Small Business Administration (SBA) or the Disadvantaged Business Enterprise (DBE) or Airport Concessions Disadvantaged Business Enterprise (ACDBE) programs. Affiliation means that one business is controlled by or has the power to control another business, or that a third party has the power to control both businesses. Control can be either affirmative or negative, meaning that a minority shareholder or partner can have influence over the actions or decisions of a business. Affiliation can also happen indirectly through intermediaries or relationships. The SBA looks at various factors to determine affiliation, such as ownership, management, previous relationships, and contractual relationships. Affiliation can be based on the totality of circumstances, meaning that the SBA can find affiliation even if no single factor is enough to prove control.
Affiliation can affect the eligibility of a small business for federal contracts and programs, because the SBA adds the size and revenue of the affiliated businesses together to determine if the business meets the size standards for its industry. Therefore, a business that is affiliated with a larger or more profitable business may not qualify as a small business for certain opportunities. However, there are some exceptions to the affiliation rules that allow certain types of businesses to remain independent and eligible for federal contracts and programs.
Some of the exceptions to the affiliation rules are:
- Business concerns owned by investment companies licensed under the Small Business Investment Act are not considered affiliates of such investment companies.
- Business concerns owned and controlled by Indian Tribes, Alaska Native Corporations (ANCs), Native Hawaiian Organizations (NHOs), Community Development Corporations (CDCs), or wholly-owned entities of these groups are not considered affiliates of such entities or with other concerns owned by these entities due to common ownership or management.
- Business concerns that lease employees from companies primarily engaged in leasing employees or enter into a co-employer arrangement with a Professional Employer Organization (PEO) are not affiliated with the leasing company or PEO based solely on the leasing agreement.
- For financial, management, or technical assistance under the Small Business Investment Act, an applicant is not affiliated with investors listed in 13 CFR 121.103(b)(5)(i) through (vi), which include venture capital operating companies, employee benefit or pension plans, charitable trusts, foundations, endowments, investment companies registered under the Investment Company Act of 1940, and investment companies not registered due to ownership by less than 100 persons.
- A firm with an SBA-approved mentor-protege agreement is not affiliated with its mentor or protege firm solely because of the agreement, if the protege firm receives assistance from the mentor under the agreement.
- The member shareholders of a small agricultural cooperative are not considered affiliates of the cooperative by virtue of their membership.
- A small business contractor may enter into a Small Business Teaming Arrangement with one or more small business subcontractors and submit an offer as a small business without regard to affiliation, provided each team member is small for the size standard assigned to the contract or subcontract.
- The relationship of a faith-based organization to another organization is not considered an affiliation if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.
There are also different types of affiliation that the SBA may find based on the specific circumstances of a business relationship. Some of the types of affiliation are:
- Affiliation based on stock ownership, which occurs when a person owns or has the power to control 50 percent or more of a concern's voting stock, or a block of voting stock that is large compared to other outstanding blocks.
- Affiliation arising under stock options, convertible securities, and agreements to merge, which are considered as if they have been exercised, unless the conditions are impossible to fulfill, or the probability of the transaction is extremely remote.
- Affiliation based on common management, which occurs when officers, directors, managing members, or partners who control one concern also control one or more other concerns.
- Affiliation based on identity of interest, which may arise among two or more persons with identical or substantially identical business or economic interests, such as family members operating concerns in the same industry and geographic area.
- Affiliation based on indirect control, which may occur when an individual, concern, or entity exercises control through a third party.
- Affiliation based on the newly organized concern rule, which may occur when former or current officers, directors, principal stockholders, managing members, or key employees of one concern organize a new concern in the same or related industry or field of operation.
- Affiliation based on license agreements, which may occur if there is a license agreement concerning a product or trademark that is critical to the operation of the licensee, unless the licensee has the right to profit from its efforts and bears the risk of loss.
- Affiliation based on the ostensible subcontractor rule, which may occur when a concern and its ostensible subcontractor perform primary and vital requirements of a contract or are unusually reliant on each other.
- Exceptions to affiliation for portfolio companies of a venture capital operating company, hedge fund, or private equity firm, which exist unless the venture capital operating company, hedge fund, or private equity firm owns a majority of the portfolio company or holds a majority of the seats on the board of directors.
As a small business owner, it is important to understand the concept of affiliation and how it can affect your eligibility for federal contracts and programs. You should review the SBA's regulations and guidance on affiliation and consult with a legal or business advisor if you have any questions or concerns about your affiliation status.
If you have any questions about SBA findings of affiliation or government contracting matters generally, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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