SBA Proposes Sweeping Overhaul of Small Business Size Standards

The U.S. Small Business Administration (SBA) on August 20, 2026, published two interrelated proposed rules in the Federal Register that, if finalized, will represent the most significant restructuring of small business size standards in decades. The first, a Revised Size Standards Methodology (91 Fed. Reg. 54096), overhauls the analytical framework for setting size standards. The second, a Proposed Rule on Small Business Size Standards (91 Fed. Reg. 53741), implements that methodology to consolidate nearly 1,000 industry-specific standards into 338 and significantly raise thresholds across the board.

Together, the proposed rules would newly classify approximately 114,541 businesses as small,¹ including 37,002 firms² holding fiscal year (FY) 2025 federal contracts worth approximately $71 billion.³ The changes carry major implications for small business set-aside eligibility, competitive dynamics in government contracting, and mergers and acquisitions (M&A) strategy. Comments on both rules are due September 21, 2026.

Summary of Proposed Revised Size Standards Methodology (91 Fed. Reg. 54096)

The SBA published a notice of availability for its revised methodology white paper, which proposes fundamental changes to how the agency calculates and assigns size standards. See 91 FR 54096 (Aug. 20, 2026) (Docket No. SBA-2026-0265). Key changes include:

• Consolidation from Six-Digit to Four- and Five-Digit NAICS Levels. The proposal reduces approximately 1,000 industry-specific size standards to 338 (276 at the four-digit level and 62 at the five-digit level), simplifying the current system and reducing North American Industry Classification System (NAICS) code confusion and related size protests.⁴
• Simplified Three-Factor Formula. The prior methodology used seven factors to set size standards.⁵ The new methodology uses three: 1) national industry size, 2) number of geographic markets and 3) a net imports adjustment – combined into an "average market size" metric.⁶
• Elimination of Size Standard Caps. The proposed methodology eliminates all explicit maximums.⁷ New minimums are set at 500 employees (employment-based) or $30.6 million (receipt-based).⁸ In other words, every industry gets at least a 500-employee or $30.6 million threshold. Small industries can't have unusually low size standards that lock firms out prematurely, and there is no longer a hard cap preventing larger industries from having proportionally higher size standards. If finalized, this would significantly expand the universe of firms that qualify as "small."
• Productivity Adjustment. For the first time, monetary-based size standards will incorporate a productivity growth adjustment in addition to inflation, ensuring standards keep pace with real economic growth.⁹
• Elimination of Federal Contracting Exceptions. All 18 existing size standard exceptions for federal contracting are proposed to be eliminated.¹⁰
• No Reductions. The SBA proposes not reducing any existing size standard, even where the revised analytics suggest a decrease.¹¹

Summary of Proposed Rule: Small Business Size Standards (91 Fed. Reg. 53741)

The companion proposed rule implements the revised methodology. See 91 Fed. Reg. 53741 (Aug. 20, 2026) (RIN 3245-AI67; Docket No. SBA-2026-0199). By way of summary, SBA proposes to:

• Shift to Employee-Based Standards. The revised proposed methodology defaults to employment-based size standards for all industries except where Congress has specifically mandated receipt-based standards for services.¹²
• Significant Proposed Changes to Certain Revenue-Based NAICS Codes. The proposed rule also seeks to make dramatic changes to the size standards in many NAICS that are to remain revenue-based. For example, NAICS 541512 (Computer Systems Design Services) and 541519 (Other Computer Related Services) would jump from $34 million to $531 million.¹³ NAICS 541330 (Engineering Services) would jump from $25.5 million to $252 million.¹⁴
• Streamline Size Standards. The proposed rule seeks to replace the current system of 102 different size standard levels covering 978 NAICS industries plus 18 subindustries with a streamlined system of 338 size standards.¹⁵
• Expand Classification of What Entities Qualify as a Small Business. The proposed rule also would classify approximately 114,541 new businesses as small, increasing the total number of small businesses from 6,344,967 to 6,459,508 (approximately 2 percent).¹⁶ According to SBA, this would result in 37,002 unique firms holding FY 2025 federal contracts – worth approximately $71 billion across approximately 105,655 contracts – becoming newly eligible as small businesses.¹⁷

General Implications for Industry: An Expanded Small Business Pool

If the proposed rule is finalized as written, SBA projects that 37,002 firms holding $71 billion in existing contracts will become newly eligible as small. From a practical standpoint, this means the competitive landscape for small business set-asides will shift dramatically if the proposed rule moves forward to finalization. Contractors that have operated comfortably in restricted competitions will face a materially larger field of qualified competitors – many of them sophisticated firms with established past performance that simply outgrew the prior thresholds. For agencies, the expanded pool should ease the perennial challenge of meeting the statutory 23 percent small business contracting goal, but it also raises questions about whether and how contracting officers will adjust their market research and acquisition strategies accordingly. Firms that were previously too large to qualify should evaluate whether they can now access 8(a), HUBZone, Service-Disabled Veteran-Owned Small Business and Women-Owned Small Business set-aside programs – though eligibility for these programs requires satisfying additional criteria beyond size status alone.

Perhaps one of the most consequential changes for day-to-day business planning is the shift to preferring employee-based standards (although as flagged above many receipts-based NAICS are proposed to remain). Under the current regime, winning a large contract can paradoxically harm a firm by pushing its five-year average annual receipts over the size threshold – creating what the industry has long called the "benefit cliff." The proposed rule largely eliminates this dynamic: If headcount is the measuring stick, revenue growth from contract performance no longer triggers a loss of small business status. This may fundamentally change how firms approach bid/no-bid decisions and organic growth strategies. Additionally, firms that previously "graduated out" of small business status due to receipt growth – but that maintained stable headcounts – may find themselves re-eligible under the new thresholds.

The consolidation from nearly 1,000 NAICS codes down to 338 size standards may also reduce – though likely not eliminate – size protest activity. SBA's data shows that annual size protests fell from approximately 500 to 600 during 2011 to 2016 to roughly 300 per year during 2020 to 2024, a decline SBA attributes in part to the size standard increases from its first two five-year reviews.¹⁸ The simplified structure may help on the margins: Fewer granular NAICS distinctions may mean fewer disputes over whether a procurement was assigned the correct code – a common predicate for size protests. That said, protests are unlikely to disappear entirely. The proposed rule still maintains 338 separate standards, affiliation analysis remains complex, and contracting officers will still face judgment calls at the boundaries of four-digit industry groups. Moreover, the transition period itself may generate a wave of protests as incumbent small businesses challenge newly eligible competitors.

Potential Impacts on M&A

The proposed rules may create several key implications for M&A in the government contracting industry.

SBA's size standards determine whether a business qualifies as "small" and is eligible for set-aside programs. 13 C.F.R. Section 121.101(a). A contractor's size is not measured in isolation – SBA determines affiliation based on ownership, management, prior relationships and contractual relationships and will find affiliation based on the totality of the circumstances even where no single factor is dispositive. Id. Section 121.103(a)(1)–(5). In determining size, SBA counts the receipts, employees, or other measures of size of the concern and all of its domestic and foreign affiliates. Id. Section 121.103(a)(6).

These affiliation rules have always been a critical factor in M&A transactions. Private equity (PE) and strategic buyers risk becoming affiliated with a target that holds small business set-aside work, potentially disqualifying the target from bidding on new set-aside contracts upon recertification. As a result, buyers have historically discounted small business set-aside work because its value may not be fully realized post-acquisition and because buyers expect portfolio companies to grow beyond the size limitations.

The revised size standards do not eliminate this issue. Buyers must still account for the point at which the acquired contractor must derive value from sources other than set-aside work. PE buyers in particular are often looking ahead to a subsequent exit where the contractor's value must be demonstrated to a future buyer. Even if the proposed increases provide short-term flexibility, a similar challenge will eventually arise.

Although the proposed rules do not fully resolve the affiliation problem, they do create several potential opportunities across the M&A landscape, as summarized below:

• Small-to-Small M&A. Historically, M&A transactions between qualifying small businesses have been uncommon – small businesses often lack the capital and experience to conduct acquisitions, and the combined entity would typically exceed the size standard, disqualifying both parties from future set-aside work. Under the proposed increases, buyers previously too large to qualify for small business contracts – or to retain the set-aside contracts of an acquired company – could have significantly more room to pursue acquisitions. Similarly, small businesses may be able to combine without exceeding the size standard for their merged entity. M&A activity that substantively resembles today's middle market deals may increasingly take the form of "small-to-small" transactions.
• Joint Ventures (JVs). The proposed rules may also make JVs between small businesses significantly more viable. Under current regulations, JV partners are generally treated as affiliates unless an exception applies – either a JV created pursuant to a Mentor Protégé Agreement or an all-small JV wherein each party independently qualifies as small under the applicable size standard. Previously, the small-to-small JV exception had limited practical value – two firms near the ceiling of a $34 million standard had little margin for error because revenue from JV contracts counts toward each partner's own future size calculation. That constraint relaxes dramatically under the proposed rules. Higher thresholds (or a shift to employee-based standards less sensitive to revenue fluctuations) could give JV partners substantially more headroom before triggering affiliation concerns. Small businesses that previously could not team without jeopardizing eligibility will now be able to form JVs and compete for larger, more complex set-aside contracts – a meaningful shift in strategic flexibility.
• Roll-Up and Tuck-In Strategies. The dramatically higher thresholds may also create more flexibility for PE platforms executing roll-up strategies with multiple small business portfolio companies. A platform could complete a series of tuck-in acquisitions, absorb their combined revenue and remain below the new threshold. However, the platform would still eventually demonstrate future viability to a subsequent acquirer – overreliance on set-aside work risks a lower valuation at exit.
• SBIC Investments. The proposed changes carry significant implications for Small Business Investment Companies (SBICs). Under SBA regulations, companies owned in whole or substantial part by licensed SBICs are not considered affiliates of those investment companies for size purposes – making SBICs attractive vehicles for PE sponsors building government services portfolios while preserving small business eligibility. For example, under the current rules, an SBIC investing in a government information technology (IT) services company is required to ensure the target's receipts stay below the applicable threshold – currently $34 million for many IT services NAICS codes. Under the proposed rule, that threshold would jump to $531 million (or shift to an employee-based standard entirely), as with the proposed threshold for NAICS Code 5415 (Computer Systems Design and Related Services). The practical effect is a far larger addressable market for SBIC strategies focused on government contractors and greater flexibility for portfolio companies to grow without jeopardizing eligibility.
• Time to Grow. The higher thresholds in the proposed rules arguably give small businesses more runway before graduating from set-aside work, and a larger pool of eligible firms could mean more contracts are set aside under procurement policy such as the Rule of Two. Whether that additional time translates into stronger track records and higher valuations at exit remains to be seen.

What This May Mean for Your Business

These proposed rules, if finalized, will reshape the competitive landscape for government contractors and create new strategic opportunities for companies pursuing growth through M&A. The proposed changes for revenue-based size standards to employee-based size standards for certain NAICS and material increases in revenue-based size standards for others, if finalized, will transform the competitive landscape. If finalized, incumbent small businesses should prepare for a larger competitive field as newly eligible firms enter the set-aside market. Further, for companies and PE sponsors planning future M&A transactions, the proposed higher standards create more opportunities for acquisitions while retaining small business eligibility, but small businesses and acquirors should remain cognizant that an overreliance on small business set-aside work will likely lead to challenges in the future.

That said, the proposed changes are not without risk. For incumbent small businesses that have relied on limited competition in set-aside procurements, the influx of newly eligible – and often larger and more experienced – competitors may compress margins and reduce win rates. Firms that were previously the largest fish in the small business pond may find themselves competing against companies with significantly greater past performance, deeper bench strength and more sophisticated proposal operations. The transition period may also generate uncertainty: Contracting officers may be unsure how to apply new NAICS groupings, size protests could spike in the near term as incumbents challenge newly eligible competitors, and firms near the boundary of old and new thresholds may face difficult questions about recertification timing.

As contractors evaluate opportunities to pursue new government contracts that they are now eligible for, they should be mindful of the interplay between customer diversification and earnings quality for valuation purposes. Reducing concentration risk across agency and program relationships remains a priority, as heavy dependence on a limited number of customers can weigh negatively on enterprise valuation. At the same time, contractors should take a thoughtful approach to new contract pursuits, recognizing that not all revenue is valued equally. Contracts that establish durable, multiyear customer relationships (such as those with option periods and strong recompete positioning) can strengthen the business profile and support long-term value creation. By contrast, short-duration or one-time engagements, though potentially helpful with near-term revenue, can introduce execution risk and compliance costs without contributing meaningfully to sustainable earnings. Contractor focus in the coming period should be on selectively pursuing opportunities that build recurring revenue streams with new customers, balancing the benefits of a broader contract base against the importance of reliably maintaining and growing earnings before interest, taxes, depreciation and amortization, and proving long-term sustainable growth.

The comment period closes September 21, 2026. Firms with data supporting or opposing particular size standard levels should consider submitting comments, especially where an industry-specific standard may not adequately reflect current market conditions. Though these remain proposed rules subject to the notice-and-comment process, SBA has signaled a clear intent to proceed, and firms should begin planning now rather than waiting for final action.

Holland & Knight's Government Contracts Group and Mergers and Acquisitions Team routinely advise contractors, PE sponsors and portfolio companies on SBA size standard compliance, affiliation analysis, organizational structuring and transaction planning in the small business space. Please reach out to the authors for assistance in evaluating your size status under the proposed thresholds, preparing comments to SBA, structuring acquisitions and JVs to preserve small business eligibility, and navigating the transition if and when these rules are finalized.

Notes

¹ 91 Fed. Reg. 53770 (stating "[t]he changes to the size standards would result in a net increase of about 114,541 businesses classified as small.")

² 91 Fed. Reg. 53771 (stating "SBA estimates that nearly 37,002 unique firms with FY 2025 contracts will be newly eligible small businesses.")

³ 91 Fed. Reg. 53771 (stating "[t]ogether these firms accounted for roughly 105,655 contracts in FY 2025 for a total of more than $71 billion.")

⁴ 91 Fed. Reg. 54103 ("Based on these results, the SBA is proposing 338 size standards, 276 at the 4-digit Industry Group level and 62 at the 5-digit Industry level. This is a significant reduction from the current table which includes 995 size standards.")

⁵ 91 Fed. Reg. 54153 ("In the current version of SBA's methodology there are seven factors that are used to determine small business size standards: simple average firm size, weighted average firm size, average assets per firm, national four firm concentration ratio, national Gini coefficient, and two disparity measures of federal contracts when an industry receives more than $20 million in federal contracts.")

⁶ 91 Fed. Reg. 54153 ("The proposed method uses just three measures: national industry size, number of geographic markets, and an adjustment for net imports which are combined into an average market size measure.")

⁷ See, e.g., 91 Fed. Reg. 54149 ("The low anchor point is the minimum size standard of $30.6 million when the average market size is also $30.6 million. The high anchor point is a size standard of $500 million when the chosen such that the size standard is defined by two anchor points. The low anchor point is the minimum size standard of $30.6 million when the average market size is also $30.6 million. The high anchor point is a size standard of $500 million when the average market size is $20 billion."); 91 Fed. Reg. 54151 ("… when using both inflation and productivity the equivalent size standard in 2026 is $30.6 million.")

⁸ 91 Fed. Reg. 54148 ("For employment based size standards, the minimum size standard is 500 employees. … For receipt based size standards, the minimum size standard is $30.6 million. …")

⁹ See, e.g., 91 Fed. Reg. 54096 ("SBA is also proposing to adjust receipt-based size standards for productivity growth, and may do so between five-year reviews as necessary.")

¹⁰ 91 Fed. Reg. 54129 ("SBA also proposes to end all 18 size standards exceptions for Federal contracting. SBA believes that the other changes made to this document serve to ameliorate the issues these exceptions attempted to address in a patchwork manner.")

¹¹ 91 Fed. Reg. 54100 ("[W]hile not a part of the official size standard methodology, SBA chose not to decrease size standards even when the methodology would support it except in cases where a nationally dominant firm would be classified as small."); see also 91 Fed. Reg. 53743 ("SBA therefore proposes not to reduce any industry size standard, even in the 45 industries where analytics may propose a decrease.")

¹² 91 Fed. Reg. 53742 ("In the 2024 Methodology, it was SBA's policy to use receipt-based size standards in industries which were neither manufacturing nor services unless the industry maintained certain conditions such as high capital intensity or low operational costs. The proposed methodology takes the opposite approach and defaults to employment-based size standards for all industry groups or industries where SBA has discretion. This will reduce the number of firms fluctuating between small and other than small business status, due to business volatility, inflation, and productivity growth.")

¹³ 91 Fed. Reg. 54195 (showing 5415 Computer Systems Design and Related Services changing to $531 million under the proposed rule).

¹⁴ 91 Fed. Reg. 53763 (showing 541330 Engineering services changing to $252 million in receipts under the proposed rule).

¹⁵ 91 Fed. Reg. 53742 ("Currently, there are 102 different size standards levels, covering 978 NAICS industries and 18 subindustries (commonly known as 'exceptions' in SBA's table of size standards). Seventy-three of these size levels are based on average annual receipts covering 496 industries and 13 subindustries ('exceptions'), 27 are based on average number of employees covering 477 industries and five subindustries ('exceptions'), one is based on refining capacity covering one industry, and one is based on average assets covering four industries."); Id. ("The Revised Methodology instead sets size standards at a combination of 4- and 5-digit NAICS code which simplifies these to 338 individual size standards.")

¹⁶ 91 Fed. Reg. 53771 ("The proposed size standard increases the total number of eligible small businesses from 6,344,967 firms to 6,459,508 firms, an increase of close to 2 percent.")

¹⁷ 91 Fed. Reg. 53771 ("SBA estimates that nearly 37,002 unique firms with FY 2025 contracts will be newly eligible small businesses. Together these firms accounted for roughly 105,655 contracts in FY 2025 for a total of more than $71 billion.")

¹⁸ 91 Fed. Reg. 53774 ("The SBA's historical data on size protests reveals that the number of size protests decreased following the increases size standards which resulted in more eligible small businesses. This was part of the first and second five-year reviews of size standards under the Jobs Act. Specifically, on an annual basis, the number of size protests fell from about 500–600 during 2011–2016 to an average of about 300 during 2020–2024.")

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