SmallGovCon: Setting the Standard: How the SBA Determines Size Standards for Small Businesses

“The SBA revised its size standards methodology most recently back in April 2019. This methodology is compiled in a 59-page document located here. We thought it’d be useful to break down and summarize this document for your convenience…

The first thing the SBA looks at is probably the simplest factor: What’s the average size of a firm in the industry in question? A simple averaging of the industry’s total receipts or employees divided amongst the total number of firms is the first step here. However, that alone is generally not enough. Often, industries have a few very large firms and then many small firms. Just using the average alone weighs in favor of the larger firms. As such, the SBA conducts a weighted average calculation that takes this fact into account. The specific calculation the SBA uses is in the document if you are curious…

The SBA also considers start-up costs and entry barriers for new firms in an industry when making size determinations. Naturally, it costs more to start up a firm for some industries than for others. For example, a janitorial services company might require some cleaning equipment and transportation to start, whereas a nuclear power provider obviously would need a nuclear reactor (which we imagine is quite costly). Greater start-up costs and entry barriers suggest a higher size standard is appropriate.  Unfortunately, there isn’t really data on actual start-up costs and entry barriers, so the SBA often looks at the average assets sizes for industries to get a sense on how much capital is needed for firms in that industry at a minimum. This, too, isn’t perfect, so SBA is always looking for other suggested means of calculation for this factor…” Read the full article here.

Source: Setting the Standard: How the SBA Determines Size Standards for Small Businesses – By John Holtz, May 26, 2022. SmallGovCon.

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