SBA Proposes Major Overhaul of Small Business Size Standards: What Businesses, Government Contractors, and Investors Need to Know

The Proposal at a Glance

The proposals would reset the relationship between business growth and eligibility for federal small business programs. SBA's current framework relies on numerous six-digit NAICS standards and subindustry exceptions, with thresholds that can vary sharply among closely related businesses. The proposed structure would use a common standard for broader four- and five-digit groupings, while the proposed floors and removal of ceilings would permit substantially larger thresholds in industries with larger markets. The current standards would remain in effect unless and until final rules are issued.

The Two Proposed Rules

Revised Size Standards Methodology: Published at 91 Fed. Reg. 54096 on August 20, 2026, and identified as Docket No. SBA-2026-0265, the first proposal explains how SBA would calculate size standards. It would replace the current seven-factor methodology with a single formula using national industry size, the number of geographic markets, and a net imports adjustment to derive an "average market size." SBA would also add a productivity adjustment based on nominal gross domestic product (GDP) per employee to the existing inflation adjustment for receipts-based standards.

Proposed Rule on Small Business Size Standards: Published at 91 Fed. Reg. 53741 on August 20, 2026, and identified as Regulation Identifier Number (RIN) 3245-AI67 and Docket No. SBA-2026-0199, the second proposal would apply the revised methodology across the 338 proposed industry groups and industries. It would set 208 standards by employee count, 129 by receipts, and one by assets; establish minimums of 500 employees or $30.6 million in receipts; eliminate explicit caps; and preserve all existing standards from reduction.

Service versus non-service classification: The proposed methodology uses a three-part test to determine whether an industry is treated as non-service for purposes of selecting the size measure: whether physical objects are transferred, whether physical objects are the focus of the business, and whether ownership or long-term practical control of the object is being transferred. Only when all three conditions are satisfied would an industry be treated as non-service; otherwise, it generally remains service-based and may receive a receipts-based standard where permitted.

Exceptions and NAICS changes: SBA would eliminate all 18 federal contracting exceptions, including the ITVAR exception under NAICS 541519. The methodology would therefore simplify the current system but also require companies and contracting officers to map existing six-digit NAICS codes to the proposed four- and five-digit groupings and assess how the new standards apply to pending and future procurements.

Notable Industry-specific Examples

The magnitude of the proposed changes is most apparent in industries that currently use receipts-based standards. The table below summarizes selected comparisons from the proposals. The proposed thresholds are not yet effective, and the applicable current standard remains controlling unless SBA adopts a final rule.

Public Reaction and Comment Period Extension

The proposed rules drew an immediate and largely negative public response. As of September 21, 2026, SBA received approximately 2,100 unique comment submissions on the size-standards proposal, most of which opposed the proposals as drafted. SBA held a virtual public forum on September 17, 2026, at which more than 200 participants signed up to provide testimony, and an in-person town hall in Denver on September 21, 2026.

Small business owners and industry groups raised several recurring concerns: (1) the speed and magnitude of the proposed threshold increases, with some NAICS codes seeing increases of more than 1,000 percent (for example, NAICS 541611 would increase from $24.5 million to $295 million); (2) the risk that significantly larger firms qualifying as "small" would create competitive imbalances for truly emerging and smaller businesses in set-aside procurements; and (3) requests for phased implementation rather than immediate large-scale changes. Industry trade associations, including Associated Builders and Contractors, led coalition comment letters raising concerns about specific sectors.

On the legislative front, Representative Nydia Velázquez (D-NY), ranking member of the House Small Business Committee, circulated a "dear colleague" letter urging SBA to withdraw the proposed rules and requesting a committee briefing on the methodology and data underlying the proposed changes. A letter from 13 senators, including Senator Edward J. Markey, also opposed the proposed changes. House Small Business Committee staff testified at the September 17 forum that the proposals would "allow for an 'only 30-day' comment period" and warned that permitting firms ten to 20 times the size of current small businesses into the set-aside market would "push most of them out."

SBA's Office of Advocacy issued its own analysis on September 17, 2026, generally supporting the proposed modernization but significantly revising the impact estimates. The Office of Advocacy found that only 4,000 to 6,000 current small contractors would gain small business status under the proposed rule, compared with SBA's headline estimate of 37,002 firms, describing the proposal as a "narrow, targeted adjustment to eligibility, rather than a broad expansion of the small-business marketplace."

In response to the volume and tenor of the feedback, SBA extended the comment periods for both proposals by 60 days, from September 21 to November 20, 2026. The extension notice, published at 91 Fed. Reg. 60524 on September 24, 2026, cited "requests for additional time to comment and following the SBA's clarification of the impacts of SBA's proposed changes."

Implications for Government Contractors

Expanded competition and set-asides: The 37,002 current contractors identified by SBA would newly qualify as small across approximately 105,655 FY 2025 contracts worth about $71 billion. Because the Rule of Two directs agencies to consider set-asides when at least two responsible small businesses can compete at fair market prices, quality, and delivery, a larger eligible pool could result in more small business set-asides. At the same time, incumbent small businesses may face larger and more capable competitors in procurements that remain set aside.

Protests and transition administration: SBA reports that annual size protests fell from approximately 500 – 600 in 2011 – 2016 to approximately 300 in 2020 – 2024, in part as thresholds increased. The consolidation may reduce disputes over finely drawn NAICS distinctions, but transition-period challenges may increase as contracting officers assign new groupings and firms test the status of newly eligible competitors.

Implications for Mergers and Acquisitions (M&A) and Private Equity

Affiliation remains central. SBA's proposal changes the size thresholds and measures but does not eliminate the affiliation rules. SBA generally counts the employees, receipts, or other applicable measure of a concern together with those of its domestic and foreign affiliates, so higher thresholds do not eliminate the need to analyze control, ownership, management, contractual relationships, and other affiliation factors in a transaction.

More room for scale and deal structuring. Higher thresholds could support roll-up and tuck-in strategies, make small-to-small M&A more attractive, create additional headroom for joint ventures, and expand the addressable market for Small Business Investment Company (SBIC) investments in government contractors. Those opportunities must be weighed against customer concentration, set-aside dependence, performance-of-work requirements, and the possibility that a later transaction or change in control will trigger recertification or affect contract eligibility.

Implications for Small Businesses and SBA Program Participants

Eligibility gains, but not automatic program access: Businesses that fall below a proposed threshold could regain or retain small business status for federal contracts, SBA loans, and other programs. Size eligibility alone, however, does not confer 8(a) Business Development; Historically Underutilized Business Zone (HUBZone); Women-Owned Small Business (WOSB) or Economically Disadvantaged Women-Owned Small Business (EDWOSB); and Veteran-Owned Small Business (VOSB) or Service-Disabled Veteran-Owned Small Business (SDVOSB) status. Each program's separate ownership, control, management, certification, and location requirements would continue to apply.

Growth and transition considerations: The shift toward employee-based standards may reduce the benefit cliff for growing firms by making status less sensitive to year-to-year revenue changes, but firms that move from receipts to employee measures will need reliable workforce data and affiliate-inclusive calculations. Companies should not change System for Award Management (SAM) representations or assume the proposed standards apply until a final rule and effective date are established.

What Companies Should Do Now

Map the new classifications: Identify each current primary and secondary NAICS code, compare the applicable current standard with the proposed four- or five-digit grouping, and flag any change from receipts to employees, assets, or a different threshold.

Model competitive and program impacts: Using affiliate-inclusive data, model status under both regimes; assess likely effects on pipeline, pricing, capture strategy, teaming arrangements, subcontracting plans, and contract vehicles; and evaluate eligibility for 8(a), HUBZone, WOSB/EDWOSB, VOSB/SDVOSB, and other SBA programs.

Revisit transactions and relationships: Reassess acquisition, roll-up, and small-to-small M&A strategies; review planned and existing joint ventures, mentor-protégé and other teaming arrangements, and SBIC financing structures; and evaluate ownership, control, affiliation, and recertification timing before signing or closing a transaction.

Prepare for implementation and comment if warranted: Preserve records supporting current size representations, plan for transition to new NAICS groupings, and consider submitting data-driven comments on the proposed standards, methodology, classification tests, and exceptions before the extended November 20, 2026, deadline.

Comment Period and Key Dates

Comment deadline: SBA published both proposals on August 20, 2026. Comments on the Revised Size Standards Methodology at 91 Fed. Reg. 54096 and the Proposed Rule on Small Business Size Standards at 91 Fed. Reg. 53741 were originally due September 21, 2026, but SBA extended the deadline to November 20, 2026. Comments should identify Docket No. SBA-2026-0265 for the methodology and RIN 3245-AI67, or Docket No. SBA-2026-0199 for the size-standards proposal. The extension notice was published at 91 Fed. Reg. 60524 on September 24, 2026.

Current status: The proposals are not final and would not operate retroactively. Until SBA issues final rules and establishes an effective date, companies should continue applying the existing size standards, while modeling the proposed regime for bids, transactions, certifications, and strategic planning. Given the significant public opposition and the extended comment period, the timeline for final rulemaking remains uncertain.

Conclusion

If finalized substantially as proposed, the rules would represent the most significant change to SBA size standards in decades. However, the overwhelming public opposition and congressional scrutiny during the comment period suggest the final rules may be modified, delayed, or withdrawn. The combination of broader industry groupings, higher thresholds, employee-based measures, and the elimination of contracting exceptions would create new opportunities for growth while reshaping competition and transaction planning across the federal market. Companies should begin analyzing the proposal now rather than waiting for final implementation.

If you have questions or need additional information, please contact Robert H. Wall, Omkar Mahajan, or a member of Baker Donelson's Business and Corporate Team.