The definition of a small business enterprise is a fluid one, changing based on ever-shifting market conditions. This is important because of the various benefits afforded to businesses that are classified as small. As such, less-than-large businesses need to stay current on small business size standards, as do supplier diversity programs that want to keep accurate supplier data.
In this article, we answer common questions faced by small business owners as well as the new size standards.
What is a Small Business Enterprise?
Small is always a subjective term, often blurred when a business starts to reach “medium” levels of success, leading businesses of all sizes to ask, what constitutes small?
In the aftermath of the 2010 JOBS Act, the Small Business Administration (SBA), in conjunction with Office of Management and Budget (OMB), attempted to answer that question.
In 1997, the SBA adopted the North American Industry Classification System (NAICS) as a basis for establishing size standards required by the Small Business Act. But markets change, and the 2010 JOBS act required the SBA to review the business and industry standards in the NAICS and evaluate the entire market every five years. The SBA immediately went to work.
In 2017, the SBA released results of the their review of the national market, including industry trends, market share, business participation, and adequate competition. The changes to the size standards of NAICS Codes were a direct result of the government evaluation and an attempt to establish objective standards for size.
As of October 1, 2017, the NAICS changes have been codified in time for the federal fiscal year 2018.
So, to answer the question, it depends on the industry. To determine if a company is officially recognized as a small business:
Why do size standards even matter?
Small business support programs, allotted contract opportunities, loans and certifications are available to small businesses from the federal government
But how do you know if you can utilize these programs?
By reviewing the size standards. The NAICS 2017 SBA size standards provide a window into the business sector and an objective glimpse into what constitutes small within the market.
While having 500 employees or less isn’t an exact alignment with the SBA definitions of small, in concert with the NAICS 2017, it establishes the sheer scope of small business participation in the United States.
The fact that so many businesses within the US qualify as small, standard sizing and established, objective norms create an equitable playing field.
And better yet, these standards provide millions of businesses with access to capital, SBA loans, certification programs and educational opportunities, as well as contracting opportunities specifically allocated for small business.
But we are a large business?
Congratulations. You’ve made it to the promised land. But the size standards aren’t just important for small firms, they are vital for your large business, especially in the federal marketplace.
The Federal Government supports a strong small business market and have codified that support in the Small Business Act and certification programs. Large businesses are not only highly encouraged to use small business subcontractors, they are often required to do so.
When large businesses subcontract out federal contracts above the Simplified Acquisition Threshold of $150k they must allow small businesses “maximum practicable opportunity” to earn the subcontract. In other words, small businesses must be given a fair shot at the opportunity.
Also, large businesses issuing awards in excess of $700k ($1.5m for construction) are required to draft and execute Subcontracting Plans. These plans establish minimum small business participation and provides avenues for small business enterprises to target opportunities.
As more governments, businesses, and institutions implement subcontracting plans with targeted markets (woman-, veteran-, service-disabled veteran-, LBGT-, minority-, and disadvantaged-owned businesses), large businesses have a captive market of small businesses ready to fulfill the requirements.
With the size changes, the small business supply market opened up slightly with the FY17 changes.
So, what changed in the past year?
Honestly, not much. But enough to be noteworthy.
Based on the studies conducted by SBA and OMB, NAICS 2017 created 21 new industries by reclassifying, combining, or splitting existing industries established by NAICS 2012.
The alignment of the industries more accurately reflects the state of the market and current conditions. However, only a few industry size standards were affected by the change.
The SBA estimates that just 60 additional firms qualify as small under the updated size standards and small business program eligibility.
Furthermore, four firms were impacted by the decrease in size standards, though SBA and NAICS’s economic analysis reveal that these firms do not currently utilize SBA loans or participate in any of the small business programs.
Altogether, it isn’t that large of a change, but it is still very important to be aware of present and future size standard adjustments.
Complacency could spell disaster on both sides: small businesses could miss out on lucrative subcontracting opportunities, and large, prime contractors could be at risk for compliance audit failure.
Below are a few of the most important changes to the size standards.
- NAICS 211120 (Crude Petroleum Extraction) and NAICS 211130 (Natural Gas Extraction) realign with new numbers. In addition, there’s an increased from 750 employees to 1,250 for NAICS 211130.
- NAICS 335220 (Major Household Appliance Manufacturing) combines multiple previous NAICS and increased size standard from 1,250 to 1500 employees.
- NAICS 454110 (Electronic Shopping and Mail Order Houses) merges previous NAICS and increased annual receipts from $32.5 to $38.5M.
- NAICS 452210 (Department Stores) combines two previous NAICS and increased annual receipts to from $29.5M to $32.5M.
- NAICS 512250 (Record Production and Distribution) combines two NAICS and changes the standard from annual receipts to number of employees. In addition, the number of employees has decreased from 1,250 to 250 employees.
My industry size wasn’t affected?
Most industries size standards weren’t, but there were multiple small changes in the NAICS including NAICS reclassifications, mergers, splits, and name changes. And those changes could affect your business, or your subcontractors.
Many organizations with federal contracts choose to use a supplier management portal or quarterly data cleansing to more-easily manage size standard changes. A management portal allows suppliers to update their company information themselves, eliminating administrative work for your team, while data cleansing uses a third-party database to ensure your master vendor file is always up-to-date.
Not to sound like a broken record, but it is vital to remember that even if the 2017 changes don’t affect your business, it does not mean that future changes won’t. Every five years, the SBA and OMB will release revised NAICS Code after extensive review. Stay ahead of the changes; avoid a situation that could jeopardize your federal contracts.
Have you checked your business size standard and NAICS recently? Were there any notable changes?