IT contractors prepare for new small-business rule

TYSONS CORNER, Va. -- Government information technology contractors are scrambling to learn more about new re-certification rules set to go in place later this year for small businesses working with the government.

The Information Technology Association of America hosted a breakfast on the topic here Wednesday with attorneys, consultants and a representative from the Small Business Administration, which is imposing the regulation that goes in effect in June.

Under the new rule, all small businesses receiving contracts through preference awards will have 30 days to report any mergers or acquisitions that affect the size of their business. In the fifth year of any long-term contracts with federal agencies, they also will have to report any updates on the size of their business.

"The agency always had the option to ask you to re-certify. Now it's a much more formal process," said Valerie Perlowitz, president and CEO of Reliable Integration Services, which manages large networks for the Defense Department and other agencies.

The rule proposed in 2003 was designed to fix a perceived loophole. SBA estimates that in its first year, the rule will impact 2,300 small businesses that may no longer be so small.

Dean Koppel, the assistant administrator of SBA's office of research and policy, said agencies do not necessarily have to search for new contractors if companies are found to no longer qualify for special treatment as small businesses, but he said that is likely to happen.

Todd Overman, an attorney at Hogan & Hartson, said the impact likely will be less business "flowing to companies that can't define that they're small and a decrease in the acquisition value of a small business." Overman said an interested buyer of a firm likely will think twice because the future revenue stream of that small company will be more uncertain.

He said the re-certification rule also applies to joint ventures that some small companies have with larger companies, but so far it does not apply to subcontractors.

"It could potentially have an impact on stock valuations," Perlowitz said of the reporting rule.

Dennis Roberts, chairman of The McLean Group, a private investment bank specializing in mergers and acquisitions, added: "It is serious. It is certainly not deadly. It will make merger and acquisition transactions certainly more difficult and done with greater pondering."

Olga Grkavac, who handles small-business issues for ITAA, said part of the reason the rule "was so controversial was because it was a surprise." She told Koppel that ITAA commented on it and asked repeatedly for updates, and then it was suddenly enacted.

"Because of this, businesses that had bought other companies recently realized they overpaid and those small businesses thinking of selling were caught short," Grkavac explained during a question to Koppel.

Koppel said the process took a long time behind the scenes to go through both the White House Office of Management and Budget and comments from other agencies on both the proposed and final rules.

Overman said he hopes Congress does not try to impose an annual review of all small-business contracts because of the reporting burden for both companies and the agencies processing all of the information.