A cornerstone of the Small Business Administration (SBA) size regulations is that a business’s size is determined by measuring its size in addition to the size of its affiliates. The recent SBA Office of Hearings and Appeals (OHA) decision in Size Appeal of: Cazador Investments LLC (Appellant), SBA No. SIZ-6048, 2020 WL 897975, discusses one of several ways that affiliation may be found under the SBA regulations: identity of interest, which may be based on familial ties among businesses.
The underlying procurement in this matter was set aside for small businesses. On September 25, 2019, the contracting officer announced that Appellant was the apparent awardee of the contract for “relocation, storage, maintenance, appraisal, and disposal services” with the U.S. Marshals Service (USMS) Asset Forfeiture Division. Of relevance, in its proposal, Appellant referred to Nielsen Beaumont Marine, Inc. (NBMI) as a “teaming partner” and subcontractor and proposed to lease and use NBMI facilities to store vessels, aircrafts, and seized assets. Appellant also proposed to retain NBMI’s National Seized Asset Manager as a consultant or employee of Appellant.
Two unsuccessful offerors protested the award on the basis of Appellant’s size. Essentially, because Appellant was owned and operated by Hunter Beaumont and NBMI was owned and operated by Mr. Beaumont’s father, the protesters argued that Appellant was other than small as it was either a front company for or affiliated with NBMI—and combined, the two firms did not meet the applicable size standard. Following its investigation, SBA’s Area Office sided with the protesters and issued size determinations finding that Appellant was not a small business.
Under the affiliation regulations, “[f]irms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns.” 13 CFR § 121.103(f)(1).
The decision cited OHA precedent where the familial identity of interest presumption was rebutted: where the family members have no business relationship or involvement with each other or where the family members are estranged. Moreover, according to OHA, de minimis dealings among businesses may still permit a finding of clear fracture. However, the decision also made clear that “when the concerns in question ‘propose to continue to work together on the contract at issue,’ this ‘almost mandates a finding of no clear fracture.'”
Here, the parent-child relationship among the respective owners gave rise to a presumption that Appellant and NBMI are affiliated. The burden then shifted to Appellant to rebut this presumption. Appellant made several arguments in an attempt to show that there were clear lines of fracture between it and NBMI: the two “d[id] not share officers, employees, equipment, or anything else relating to the operation of their business,” the two businesses had different customers, NBMI did not provide financial assistance to Appellant, and Appellant was not required to and decided it would not use NBMI in its performance of the contract.
However, OHA was not persuaded by Appellant’s arguments. According to OHA, the record was replete with facts that supported the reasonableness of the Area Office’s determination: Appellant proposed NBMI as a teaming partner or subcontractor, Appellant proposed to lease and use NBMI facilities to perform under the contract, Appellant proposed to retain an NBMI employee as Appellant’s consultant or employee under the contract, NBMI loaned money to Appellant in the prior year, NBMI provided Appellant and its owner with numerous contracts and opportunities for professional development, and father and son jointly invested and controlled another entity.
The important takeaway here: small businesses trying to leverage business relationships to win and perform set-aside contracts must take into account the circumstances that give rise to a presumption of affiliation. Affiliation is presumed in a number of circumstances (including identity of interests by doing business with family), and affiliation with a business that renders your size status other than small will make you ineligible to win a small business set-aside award. When drafting proposals and establishing relationships, look to SBA regulations and OHA decisions to determine how to structure the relationship to best ensure that affiliation does not exist.