Beginning January 2026, new SBA regulations will shake up small business M&A
By Sharon B. Heaton, sbLiftOff
The world of small business M&A changes on January 17, 2026, when new rules take effect that will significantly decrease the value of many small business companies with set-aside contracts.
After that date, if a small business undergoes what is called a “disqualifying recertification” – for example if you sell your company to a buyer that does not itself qualify as “small” under the NAICS code assigned – the new acquirer will become ineligible to exercise option years of backlog. Because backlog is a major driver of the value of a small business set-aside company, losing that backlog will decrease value to the Seller.
Today there are tens of thousands of small businesses who serve the federal government. The owners of these small companies are an American tapestry – veterans, women, husband and wife teams, people operating from disadvantaged neighborhoods – all running, and trying to grow, small businesses. Over the past decade, the number of those small businesses has decreased, in part, due to purchases by larger players in the government space. These purchases allow the owner, who often has reached retirement age, to obtain the full value of the company they created and grew. Now new SBA regulations will chill that activity by making the backlog of these small businesses far less valuable after January 17, 2026, when the rules take effect.
The reason revolves around “recertification.” The federal government requires a buyer of a small set-aside company to recertify within 30 days of any merger, sale, or acquisition in order to be assured that the post-acquisition company complies with the status requirements under which the small business contracts were initially awarded.
Under the new regulations, if the new entity, post-acquisition, no longer meets the size or program status requirements under which the Seller was awarded contracts, the Buyer can still perform that contract for its current period of performance but may be precluded from exercising any option years on that contract.
Take Sam, who has an IT business that qualifies as small under a NAICS code with a revenue cap of $34.5 million. He’s got a 5-year average revenue of $15 million and wants to retire. Sam’s company has $60 million in backlog.
Under current law, if an acquirer is not small, within 30 days of the acquisition, the acquirer must file a “disqualifying” recertification. Despite that, the acquirer can exercise the $60 million in backlog (but may not be eligible to recompete these contracts). That backlog will have a major impact in determining the value that the acquirer is willing to pay for Sam’s company.
But after January 17, 2026, the situation will change dramatically. After a “disqualifying” recertification, the acquirer will not be able to exercise the option years on Sam’s contracts. So instead of getting $60 million in backlog, the acquirer may only get $15 million. Consequently, the acquirer will materially lower the purchase price offered to Sam. Owners like Sam who are planning a transaction are not happy about these new regulations.
There are two aspects of the new regs that are kinder for the small business owner. First, the new rules only apply to multiple award contracts in which there is more than 1 awardee. A direct contract award to Sam can still have all backlog exercised, even after a disqualifying certification. Similarly, the new rule will not have any impact on backlog associated with any IDIQ or BPA for which Sam is the only awardee.
Second, if Sam’s acquirer is a small business before the acquisition, but the combined entity is not small after the acquisition, the acquirer must file a “disqualifying” certification but will be able to exercise the combined backlog. While this is a current law for all such acquisitions today, after January 17, 2026, this will only be available for acquirers who were small themselves before the transaction.
What I’ve described represents a major shock to the small business ecosystem. That’s why Sam – along with many owners of these small business companies – should carefully consider whether 2025 is the year they should transfer. This is a decision that needs to be made quickly because most business sales take 9 to 12 months to complete. As a result, as the implications of these new regs sink in, the first quarter of 2025 will doubtless see a rush to the exits as owners seek to escape the harsh implications of these new SBA regulations.
These new SBA rules introduce challenges that every small business owner will have to navigate carefully. Whether you’re planning to sell your business, merge with another company, or maintain your status as a small business, proactive planning and strategic adjustments in 2025 will be key. Just remember, the world for small business set-aside companies changes on January 17, 2026.
Want to know more? CHeck out Thursday’s podcast: SBA Earthquake: New Regulations Affecting M&A with Cy Alba, PilieroMazza
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Sharon Heaton is the CEO and Founder of sbLiftOff, a national M&A advisory firm focused on government contracting.
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