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No "Small" Stakes

How SBA redefines business size will affect millions of firms

By Thuy-Doan Le
Sacramento Bee
January 11, 2005

The Small Business Administration has a big job ahead of it as the agency tries for the second time in as many years to revise the rules that determine whether a business is small.

These size standards matter deeply to millions of small-business owners who covet this status because they get priority on certain federal contracts and lending programs. In addition, they can compete for programs open only to small businesses.

The SBA's current size standards provide a clue about just how difficult it is to define "small": They consist of 37 different benchmarks for 1,151 industries and 13 subindustries.

"The more standards there are, the more confusing it is," said Michael Shaw, the assistant state director of the National Federation of Independent Business. "There's a tendency for conflict, and it's more difficult to comply."

In hopes of streamlining the standards, the SBA is seeking public comments through Feb. 1 on possible changes, said Gary M. Jackson, assistant administrator for size standards at the SBA in Washington, D.C.

The stakes are high. Last year small businesses won more than $64 billion in contracts, about 23 percent of all goods and services purchased by federal agencies.

"When the government uses tax dollars to support small businesses, it encourages them to continue going," Shaw said. "If that was not the situation, you would have large companies doing mergers all over the place and reducing competition."

Although these businesses are relatively small in size, the SBA estimates that they employ more than half of the work force in the nation's private sector and create three of every four new jobs. Economists say they also play a crucial role in driving innovation.

Since federal contracts are a critical source of revenue for large and small businesses alike, the SBA's proposal to streamline standards generated thousands of comments.

Over the past 40 years, the number of standards has ballooned as the SBA tried to account for unique situations and varying industry needs. For instance, a flour mill can make a go of it with 500 employees or fewer, the agency has ruled, but a small wholesale office supply company can do quite well with 100 or fewer workers.

For accounting firms such as Sacramento's Macias, Gini & Co. LLP, the SBA limit comes with a dollar sign. The firm smacked up against the $7 million benchmark years ago.

However, partner Ken Macias still sees his firm as small. With 105 employees and revenue of about $11.5 million, he sometimes competes against tinier rivals, but his biggest competition comes from multinationals with thousands of employees.

"Why am I not a small business?" he said. "I don't feel like we're a medium-sized business ... you've got some of these big corporations with more than $100 million ... in revenues."

Macias said he would like to see the issues discussed.

"I'm not considered a small business, but I feel like a small business," he said. "I know every one of my employees, I know most of my clients."

Small-business owners disagree among themselves about how to make the rules fair. While Macias thinks any business under $50 million should be considered small, others think the limit should be $10 million.

Fred Costales, the vice president of business development at Netelisys Inc. in Sacramento, which has 10 employees, said it's difficult to compete against larger companies in the information technology world.

He advocates a size of 100 employees or fewer and a revenue ceiling of $10 million. "We can keep it simple," he said.

Simple, however, is not a word that comes to mind when discussing the SBA's size standards. Depending on the industry, they allow businesses with as much as $48.5 million in annual receipts - or as many as 1,500 employees - to be classified as small.

The SBA tried unsuccessfully to change its standards in March. The staff proposed reducing the number of standards to 10 and basing selections solely on the number of employees, ranging from less than 50 to 1,500, depending on industry.

This idea sounds fairer to Rick Doane, owner of CM IT Solutions in Elk Grove. He said his company of six employees is tiny compared with businesses that make millions of dollars. Still, he thinks money-making companies should not be penalized.

"I would like to see the size of the company based on employees," he said. "If you start making money, it's not fair to disqualify them because they're making too much."

The SBA's proposed change, which was shelved in July, would have knocked out 34,100 of the 23.7 million businesses now in the ranks of qualified contractors, SBA officials said, but 35,200 others would have gained access.

"When you change the rules, it will affect some companies positively and some negatively," said Michael Stamler, spokesman for the SBA. "The ones who were affected negatively will complain."

More than 4,000 comments flooded the agency when the rules were proposed last March, many of them from business owners and industry groups that feared losing their small-business status.

Others, like small-business advocate Lloyd Chapman, used the opportunity to lobby the agency to set the limit on work force at 100 employees for nonmanufacturers. The agency's rule of thumb is 500 employees or fewer for manufacturing companies and $6 million in annual revenue for retail and service businesses.

The SBA's rules would affect most businesses in Sacramento, Placer and El Dorado counties. About 98 percent, or 51,128, of all businesses in the three counties employ fewer than 100 employees, said David Lyons, the labor market consultant for the state's employment development department.

Companies with 500 employees or more do not need the extra help like the regular "mom and pop" shops, said engineering firm founder Jim Mahar, echoing Chapman's point.

Still, Mahar also allows that one size does not fit all when it comes to manufacturers and the rest of the world. "A CPA firm versus an aircraft company are different worlds," he said.

Mahar, owner of Folsom-based EDA Inc., had some state contracts, he said, but he hasn't landed a federal contract yet.

"It's very hard to figure it out to start with, and once you do figure it out, you have to review all these needs," he said. "It's time-consuming."

Mahar is concerned that the size-standard changes may increase the number of larger companies he will have to compete with and lower his chances for a contract.

Political and business leaders are relieved that the SBA is seeking fresh input on the standards.

U.S. Rep. Nydia M. Velázquez of New York City, ranking Democrat on the House Small Business Committee, said the shelved proposal would have blocked millions of the nation's small businesses from gaining access to government contracts, loans and technical assistance programs.

Carol Bowyer, a senior counselor and instructor with the Federal Technology Center, a nonprofit organization that helps small businesses get federal contracts, said she was pleased at how the SBA handled things.

"The businesses ... said, 'Wait a minute, you're implementing this so fast,' " she said. "They felt there wasn't enough hearing on this."

So, in December, the SBA said it would conduct a series of public meetings across the nation on size standards. The agency said it plans to release details about dates and locations but has not yet done it, leading some agency veterans to predict the timeline will be extended.

Among the questions that the SBA will be posing are:

* Should part-time employees be counted the same as their full-time counterparts?

* Should revenue be used to determine business size?

* Should companies that currently qualify be exempt from the revised size standards?

The SBA faces a big challenge: "There is not a solution that would make everybody happy," said Chapman, founder of the American Small Business League, an advocacy group based in Petaluma. "The debate on small businesses have been going on for years."



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