The final rule implements substantial changes to eligibility requirements for acquired businesses.
As the value of an acquisition of a small-business government contractor is likely dependent on the ability to transfer any pending or current contracts to the purchaser, it is essential that all parties understand the impact of recent changes to a final U.S. Small Business Administration (SBA) rule. On January 17, 2026, the SBA’s final rule amending previous recertification requirements under 13 CFR § 125.12 finally took effect. The final rule implements substantial changes to eligibility requirements for acquired businesses. Generally, the SBA requires recertification of size and small-business program status within 30 days of a merger, acquisition or sale resulting in a change in controlling interest. The final rule, which took effect January 16, 2025, but was delayed for a year to provide additional time for parties to comply, affects businesses that cannot recertify due to a disqualifying recertification (e.g., no longer considered small or a program participant). The consequences are dependent on the type of set-aside contract held by the business, such as single-award contracts or multiple-award contracts.
Below is an outline of some of the most relevant changes in the final rule. It is noted that the final rule moved the recertification requirements to a new section of the CFR that covers all size and status recertification requirements.
Impact on Eligibility for Single Versus Multiple Award Contracts
Whether a contractor remains eligible to receive task orders or options under a government contract following a disqualifying recertification event is dependent on the type of contract.
Single Award Set-Aside
Disqualifying recertification as a result of a long-term contract or change of ownership does not impact the eligibility of a contractor to receive options (an extension of the base contract) under the contract.
Multiple Award Set-Aside
Disqualifying recertification as a result of a long-term contract or change of ownership renders a contractor ineligible to receive options (an extension of the base contract). We note that the final rule contains an exception for transactions with two small businesses. If two small businesses individually qualify as small prior to a transaction, the entity post-transaction will remain eligible for orders issued under a small-business multiple award contract.
Changes to 180-Day Rule
The timing between the disqualifying recertification and the initial offer submission may further impact the eligibility of the contractor to continue with performance of the contract.
Disqualifying Recertification Within 180 Days
If the event that triggers the recertification process occurs within 180 days of an offer submission, but an award has not been issued, the contractor is ineligible to receive the pending small-business set-aside or reserved award.
Disqualifying Recertification After 180 Days
If the event that triggers the recertification process occurs more than 180 days after the date of an offer, but an award has not been issued, the contractor remains eligible to receive a pending single award or reserve for a period of up to five years from the date of the award. However, if the award involves a multiple-award small-business set-aside or reserve, the business is ineligible for the pending award because the business cannot receive future orders that are set aside.
Addition of a Seventh Negative Control
In addition to the recertification changes, the final rule amends the affiliation rules by including a seventh permissible “negative control” for minority investors. With this change, the SBA will not find that a minority shareholder has negative control where that shareholder has power to block:
Any other extraordinary action that is crafted solely to protect the investment of the minority shareholders, and not to impede the majority's ability to control the concern's operations or to conduct the concern's business as it chooses.
This “catch-all” provision provides additional flexibility for a minority shareholder to continue to invest in small businesses and protect its interests without any concerns that the SBA would find that such entities are affiliated.
As the new regulations are now in effect, parties should implement these new requirements into their planning efforts before carrying out new merger and acquisition transactions or presenting themselves as possible sellers. The final rule additionally may allow competitors to challenge a small-business size (following an event outlined in the final rule) and, therefore, increase the scope of challenges. Failure to understand or comply with the requirements will have significant impacts on the viability of these transactions.
For More Information
If you have any questions about this Alert, please contact Geoffrey M. Goodale, Rolando R. Sanchez, Matthew Steinway, any of the attorneys in our Government Contracts and International Trade Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.