Bill would let franchises win small-business contracts

A rule change in the Small Business Administration reauthorization bill that would allow franchises of the nation's largest corporations to qualify for government contracts is being criticized by industry representatives, who claim it will "divert money from legitimate small businesses."

Lloyd Chapman, president of the American Small Business League, is waging a campaign against the provision, which he says would make "every McDonald's considered a small business." The change in the reauthorization bill, sponsored by House Small Business Chairman Donald Manzullo, R-Ill., would create size standards that franchises would have to meet to qualify for government small-business contracts, which amount to $119 billion annually.

Existing law prevents franchises from being considered for small business awards, which must make up 23 percent of government contracts. Chapman said the provision would encourage Fortune 1000 companies to buy up smaller businesses that meet the size standards to be created under the new rule.

According to the new language in the bill, a franchisee would have to maintain at least 51 percent of its previous profits and make up for its financial losses, have its own paid staff separate from the larger corporation and control day-to-day business operations, in order to qualify.

Chapman speculated that large corporations would egregiously pass off the franchises they control as small businesses to obtain more revenue. "The government has a history of helping large companies get small business contracts," he said.

SBA's Office of the Inspector General stated in a report last year that "one of the most important challenges facing the [SBA] and the entire federal government today is that large businesses are receiving small-business procurement awards and agencies are receiving credit for these awards."

The SBA, which would be reauthorized another four years under Manzullo's legislation, was criticized for its handling of reconstruction efforts in the Gulf Coast; in April, the Government Accountability Office released a report highlighting the agency's mishandling of small business contracts with Alaska native companies.

Giovanni Coratolo, executive director of the U.S. Chamber of Commerce Small Business Council, said the plan, with its size standards, would serve as an "important vehicle by which business owners could pursue" additional contracts through the government.

Coratolo said the size clarification would not give franchises an unfair advantage in contract bidding. "Franchises have to have flexible opportunities," he said, adding that the size guidelines detailed in the provision were adequate.

But Chapman also noted that the Manzullo provision surfaced only days after President Bush nominated the new SBA chairman, who most recently was a vice president at ServiceMaster, a Chicago-based company with over 5,500 locations and franchised licenses, according to its Web site.

Chapman, who noted that SBA nominee Steven Preston received the endorsement of the International Associations of Franchisers, said the pending provision would stand to "greatly benefit ServiceMaster."

Manzullo put off a markup last month after receiving 50 amendment proposals the night before the committee was scheduled to consider the bill. The delay allowed him to meet with members and to smooth out a manager's amendment, a spokesman for the lawmaker said.

The aide said there is "really no push for" marking up the reauthorization bill, "just as long as it's done by the end of the year."