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New Small Business Administration rules set to take effect on January 17, 2026, have introduced a world of hurt to the clients I help every day: the owners of small business set-aside companies. As the Office of Management and Budget’s Jason Miller recently explained, “each year, tens of thousands of small businesses serve as contractors for the federal government, providing a variety of goods and services.” These owners run the gamut from women to service-disabled veterans, from husband and wife teams to immigrants bringing a new technology or service offering.
Now their world has been turned upside down because the SBA has put in motion a set of rules that will significantly decrease the value of many of these small business companies who hold set-aside contracts.
Under the new regulations, if a small business owner in the federal space wants to sell their company, and the new entity, post-acquisition, no longer meets the size or program status requirements under which the previous owner was awarded contracts, the buyer may be precluded from exercising option years on that contract (while still being allowed to perform that contract for its current period of performance.)
This new regulation scrambles what was the state of play in small GovCon M&A and resets the table, significantly undermining the chances of some Baby Boomer owners moving on to retirement by selling their companies.
I have a client in Huntsville Alabama, let’s call him “Raul,” who served in Iraq and is a service-disabled veteran. Raul owns a cybersecurity business that qualifies as small under a North American Industry Classification System (NAICS) code revenue cap of $34.5 million. If you were to average Raul’s annual revenues over the last five years, he’s pulling in an average of $10 million every year and he’s got upwards of $50 million in backlog.
Of course, Raul’s company backlog has a major impact in determining the value that the acquirer is willing to pay for Raul’s service-disabled veteran-owned small business (SDVOSB) company.
Under current law, if Raul were to sell his company, within 30 days of the acquisition his acquirer would have to file what is called a “disqualifying” recertification unless the acquirer was also a small business. After that his acquirer would be able to legally exercise the $50 million in backlog even though they may not be eligible to recompete all of Raul’s contracts.
But after January 17, 2026, life changes for Raul. If the sale occurs on January 18, 2026 or any date after that , the buyer will not be able to exercise option years on Raul’s company contracts. So instead of getting $50 million in backlog, the acquirer may only get about $12 million in backlog. As a result, anyone who offers to buy Raul’s company post January 17, 2026 will be offering a materially lower purchase price — unpleasant news for Raul.
Congress could still stop the regulations from going into effect, but at present owners of these kind of companies need to recognize what’s about to happen next year and plan accordingly.
There are a few provisions of the SBA rule that provide a little relief from these draconian hits to valuation. The new rules only apply to multiple award contracts in which there is more than 1 awardee. A direct contract award to Raul 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 indefinite delivery/indefinite quantity or blanket purchase agreement for which Raul is the only awardee.
In addition, if Raul’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 now, after January 17, 2026, this will only be available for acquirers who were small themselves before the transaction.
Many owners of GovCon small businesses have put the vast majority of their assets into growing their company. When they take their company to market it is generally the most important financial transaction of their lifetime. For these owners the value of that critical transaction is reduced after January 17, 2026.
Owners of small businesses who work in government contracting strengthen our nation’s ability to get the goods and services our government needs, contribute to a more resilient supply chain, boost job creation in local communities, and strengthen the nation’s defense industrial base. Penalizing them at the end of their business journey by suddenly decreasing the value of their companies isn’t fair.
Congress should use its authority under the Congressional Review Act to stop these new SBA regulations before they take effect on January 17, 2026.
Sharon Heaton is the CEO and Founder of sbLiftOff, a national M&A advisory firm focused on government contracting.
The post New SBA regs threaten small business M&A first appeared on Federal News Network.