Private equity investors and strategic acquirers pursuing small business government contractors have largely absorbed one lesson from SBA’s 2025 recertification reforms. If a target has outstanding proposals for set-aside work, timing the close matters. Under SBA’s 180-day recertification rule, closing a transaction within 180 days of proposal submission can render a target ineligible for award if it cannot recertify as small. Close after day 180, and the target may remain eligible, but only for certain contracts. Single award set-aside contracts may still be within reach. Multiple award contracts generally are not.
But the 180-day rule is only part of the analysis and treating it as the complete answer to the regulatory risk of acquiring a small business target during an active procurement may leave a significant gap unaddressed. The 180-day rule addresses recertification. It does not eliminate SBA’s affiliation rules. And conflating those two regimes could cost you the award.
In a prior article, we discussed OHA’s decision in Size Appeal of Secise, LLC, SBA No. SIZ-6337 (Feb. 19, 2025), which clarified that the relevant “offer” date under SBA’s 180-day recertification rule is the date of initial proposal submission. That answered an important question about when the clock starts running. But it left a more consequential question unanswered: could SBA conclude that affiliation arose before the proposal was ever submitted, regardless of when the deal closed?
That is the risk most investors are not pricing in. And it does not come from the recertification rules at all.
(For foundational context on why recertification matters in GovCon M&A transactions, see Part 1 of The GovCon M&A Playbook.)
What Actually Changed in 2025?
Under SBA’s former recertification rule, 13 C.F.R. § 121.404(g), a merger, acquisition, or sale occurring within 180 days of proposal submission could render a contractor ineligible for award if it could not recertify as small. Notably, that regulation expressly included “agreements in principle” within the rule. In other words, SBA’s prior recertification framework explicitly recognized that a transaction might matter before it formally closed.
When SBA promulgated the new recertification regulations at 13 C.F.R. § 125.12, however, the agency deliberately removed that language. Indeed, SBA explained in the rulemaking: “Two commenters believed that recertifications should not be required in response to agreements in principle since those agreements may never be finalized or the ultimate sale or merger may take a long time . . . SBA agrees and has eliminated that language from § 125.12(a).” 89 Fed. Reg. 102493 (Dec. 17, 2024).
The revised regulation now focuses on the actual events triggering recertification, such as a completed merger, acquisition, or sale. As a result, if a transaction closes more than 180 days after proposal submission, the contractor may still be eligible to receive a pending single award set-aside contract even though it would have been ineligible had the transaction closed earlier. For transaction planners, this is significant. But it is not the end of the story.
What SBA Did Not Change
Many dealmakers are drawing a conclusion the regulations do not actually support.
SBA removed agreements in principle from the recertification trigger. But SBA did not remove agreements in principle from the affiliation analysis. Those concepts arise under entirely different regulations. The recertification rules live in § 125.12 and the affiliation rules live primarily in § 121.103.
Among those affiliation rules is SBA’s well-known “present effect” rule, codified at 13 C.F.R. § 121.103(d)(1). Under this rule, options, convertible securities, agreements to merge, and certain agreements in principle may be treated as though the rights they create have already been exercised. The doctrine exists because SBA is concerned with actual and potential control, not merely formal ownership on paper.
Accordingly, the question under the “present effect rule” is not “when did the deal close?” but, rather, “when did the parties reach an agreement that effectively transferred control or the right to acquire control?” That distinction may matter far more than many dealmakers realize.
The Real Risk Is Not Recertification
The conventional wisdom today is that if parties wait until after the 180-day mark to close, they have protected the target’s eligibility for certain pending set-aside opportunities. For a pending single award set-aside contract, that may be true from a recertification perspective.
But the larger risk may be a size protest based on affiliation. Imagine the following scenario. The parties negotiate an acquisition and reach an agreement in principle on the transaction. The target then submits a proposal for a small business set-aside procurement. Recognizing SBA’s new recertification rules, the parties intentionally delay closing until well after day 180. Under the revised recertification rule, the delayed closing may avoid the adverse consequences that would have resulted from a transaction occurring within the first 180 days after proposal submission.
A competitor, however, might make a different argument. The competitor may contend that the parties had already reached an agreement in principle before proposal submission. If true, that would mean SBA’s present-effect rule caused affiliation to arise before the proposal was ever submitted.
If SBA accepted that argument, the problem would not be recertification. The problem would be that the offeror was not small on the date size was measured. In other words, the contractor would not lose because the transaction closed too early. The contractor would lose because it was already affiliated with the buyer when it submitted the proposal.
That is a fundamentally different theory. And it is one that the 180-day rule does not necessarily solve.
Why “Non-Binding” Doesn’t Mean What Dealmakers Think It Means
The “present effect” rule is hardly new. For decades, SBA, OHA, and reviewing courts have looked beyond labels and examined whether parties have effectively reached an agreement to combine businesses. Several themes consistently emerge.
First, SBA generally focuses on substance rather than form. Calling a document a “letter of intent,” “memorandum of understanding,” or even “non-binding” agreement does not necessarily end the inquiry.
Second, SBA often evaluates the actual state of negotiations. Agreement on economics, completion of diligence, negotiated governance provisions, exclusivity obligations, and other evidence showing meaningful commitment may all be relevant to whether an agreement in principle exists.
Third, present effect is not limited to a signed purchase agreement. Options, conversion rights, warrants, and other instruments granting future ownership or control can also trigger affiliation concerns.
In short, SBA and reviewing courts may look beyond a document’s title and examine whether the parties have effectively agreed on the transaction’s essential terms. Not every letter of intent creates affiliation. Not every preliminary discussion becomes an agreement in principle. But the doctrine remains alive and well. And nothing in SBA’s 2025 recertification reforms suggests otherwise.
The Bottom Line
The lesson from SBA’s revised 180-day rule is not that transaction timing no longer matters. Nor is it that waiting until day 181 is ineffective. On the contrary, closing more than 180 days after proposal submission may provide a meaningful benefit under SBA’s recertification rules and may preserve eligibility for award of pending single-award small business set-aside contracts.
But contractors, investors, and deal counsel should not confuse recertification protections with affiliation protections.
SBA deliberately removed agreements in principle from the recertification trigger because many proposed transactions never close. It did not, however, remove agreements in principle from the affiliation rules. As a result, counting to 180 may solve one problem while leaving another untouched.
For transaction planners, the implication is clear. Do not assume the 180-day rule solves your affiliation risks. It doesn’t. The smarter question is not “when should we close?” but rather, “could SBA conclude that we were already affiliated before the proposal was submitted?” For contractors pursuing acquisitions during active set-aside procurements, that could be the question that ultimately determines whether the award survives a size protest.
What’s Next in The GovCon M&A Playbook:
In Part 3, we walk through the due diligence issues unique to government contractor acquisitions including set-aside eligibility, contract vehicle access, security clearances, joint ventures, past performance, and organizational conflicts of interest. These assets often drive a GovCon acquisition’s value and understanding how the transaction affects each one is essential to knowing what you are actually buying.
If you are structuring an M&A transaction during an active procurement, or evaluating the timing implications of SBA’s affiliation and recertification rules, please contact Sam Finnerty (sfinnerty@pilieromazza.com). Understanding when affiliation may arise, and structuring the transaction accordingly, can be the difference between preserving and losing pending proposals.
