[Federal Register Volume 91, Number 160 (Thursday, August 20, 2026)]
[Proposed Rules]
[Pages 54096-54210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-17039]
[[Page 54095]]
Vol. 91
Thursday,
No. 160
August 20, 2026
Part V
Small Business Administration
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13 CFR Part 121
Small Business Size Standards: Revised Size Standards Methodology;
Proposed Rule
Federal Register / Vol. 91 , No. 160 / Thursday, August 20, 2026 /
Proposed Rules
[[Page 54096]]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards: Revised Size Standards Methodology
AGENCY: U.S. Small Business Administration.
ACTION: Notice of availability of Revised Size Standards Methodology
for comments.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) advises
the public that it has revised its white paper explaining how it
establishes, reviews, and modifies small business size standards. The
revised white paper provides a detailed description of SBA's size
standards methodology, including changes from SBA's 2024 Revised Size
Standards Methodology (2024 Methodology, available at www.sba.gov/size). SBA welcomes comments and feedback on the 2026 Revised
Methodology, which SBA has applied to the proposed review of size
standards filed concurrently in the Federal Register.
DATES: SBA must receive comments on the 2026 Revised Methodology on or
before September 21, 2026.
ADDRESSES: You may submit comments identified Docket No. SBA-2026-0265
by one of the following methods:
(1) Federal eRulemaking Portal: www.regulations.gov. Follow the
instructions for submitting comments; or
(2) Mail/Hand Delivery/Courier: Ryan Lambert, Associate
Administrator, Office of Government Contracting and Business
Development 409 Third Street SW, Mail Code 6530, Washington, DC 20416.
SBA will post all comments on this Revised Methodology on
www.regulations.gov. If you wish to submit confidential business
information (CBI) as defined in the User Notice at www.regulations.gov,
you must submit such information to [email protected] with ``2026
Revised Methodology'' in the subject heading. Highlight the information
that you consider to be CBI, and explain why you believe SBA should
hold this information as confidential. SBA will review your information
and determine whether it will make the information public.
FOR FURTHER INFORMATION CONTACT: Ryan Lambert, Associate Administrator,
Office of Government Contracting and Business Development,
[email protected].
SUPPLEMENTARY INFORMATION:
1. Introduction
This document describes the U. S. Small Business Administration's
(SBA or Agency) proposed methodology for establishing, reviewing, or
adjusting its small business size standards pursuant to the Small
Business Act, 15 U.S.C. 631 et seq. (the ``Act''). Under the Act (15
U.S.C. 632(a)(2)(A)), the SBA Administrator (Administrator) has the
authority to establish small business size standards for federal
government programs. This document provides a detailed description of
SBA's proposed revised size standards methodology.
SBA sets the standard for what most agencies consider a small
business for myriad government programs. From their inception, small
business size standards were intended as the mechanism to allow small
firms to compete for government contracts, obtain small business loans,
obtain relief from regulatory burdens, and participate in other agency
small business programs--thereby leading to their financial and
economic success. However, over the years the SBA methodology turned
into a ceiling in which firms forewent business growth to remain small
under a seemingly unresponsive size cap. The proposed SBA methodology
adjusts the prior standards that restricted such economic growth. The
new standards strengthen American entrepreneurs by ensuring they are
not punished for their success, resulting in lost access to capital or
contracting opportunities.
The Act sets out a number of requirements for establishing size
standards. For example, no concern shall be considered a small business
concern unless it is independently owned and operated and is not
dominant in its field of operation. See 15 U.S.C. 632(a)(1). In
promulgating size standards, the Administration is required to vary
size standards from industry to industry to reflect the differing
characteristics of industries. See 15 U.S.C. 632(a)(3). Further, and
generally, the policy decisions of the Agency should assist small
businesses as a means of encouraging and strengthening their
competitive position in the economy. See 15 U.S.C. 631(a). These
considerations, along with other statutory requirements, serve as the
principal basis for SBA's size standards methodology for establishing,
reviewing, or modifying small business size standards.
SBA's proposed size standards methodology examines the structural
characteristics of an industry or industry group as a basis to assess
differences and the overall degree of competitiveness within the
industry or industry group. To ensure its size standards offer complete
coverage of all areas of the economy where small businesses may
compete, SBA uses the most recent revision of the North American
Industry Classification System (NAICS), as a method to group similar
firms. As used herein, SBA considers an industry to be a 5- or 6- digit
NAICS code and an industry group to be a 4-digit NAICS code. As
described more fully later in this document, SBA is examining industry
structure by analyzing average market size. Average market size can be
broken down into three components: first the total size of all
participants in the industry group or industry, including for-profit
businesses, not-for-profit entities, and government owned entities,
which is referred to as the national industry size; second, the number
of distinct geographic markets in which competition takes place; and
finally an adjustment for imports and exports to account for
international competition faced by domestic firms. Industry groups or
industries with smaller average market sizes are given smaller size
standards as less scale (as a matter of economics) is required in those
industries for a firm to be dominant, while industries or industry
groups with larger average market sizes are given larger size standards
as a greater level of scale is required for a firm to be dominant. If
SBA's proposed or revised size standards deviate from the analytical
results based on these factors, the Agency will provide a detailed
explanation in the final rulemaking.
In addition to reviewing all size standards and adjusting them, as
necessary, every five years based on the analysis of industry structure
in accordance with the Small Business Jobs Act of 2010 (``Jobs Act'')
(Pub. L. 111-240, 124 Stat. 2504, September 27, 2010), SBA also adjusts
all receipt based standards for inflation at the same time. SBA has
also adjusted receipt based standards for inflation between such
reviews as necessary. SBA most recently adjusted size standards for
inflation on November 17, 2022 (87 FR 69118). As laid out further
herein, SBA is also proposing to adjust receipt-based size standards
for productivity growth, and may do so between five-year reviews as
necessary. SBA also updates its size standards every five years to
adopt the Office of Management and Budget's (OMB) quinquennial NAICS
revisions to its table of small business size standards. Effective
October 1, 2022, SBA adopted the OMB's 2022 NAICS revisions (86 FR
72277; December 21,
[[Page 54097]]
2021) for its table of small business size standards (87 FR 59240;
September 29, 2022).
2. Background on SBA's Size Standards Methodology
There is a long history of the U.S. Federal Government establishing
small business size standards that predates the establishment of SBA.
This section documents the statutory authority for SBA to establish
small business size standards and the historical background from the
original establishment of a 500-employee size standard by the Small War
Plants Corporation in World War II through the most recent size
standards methodology revision in 2024. This section is broken down
into four parts. First is an overview of the statutory authority for
SBA's establishment of small business size standards. Second is the
legislative history of that statutory authority. Third is the
regulatory history of SBA's implementation of that statutory authority.
Last is a summary of the most recent size standards methodology from
2024, which this document is modifying. SBA requests comment on its new
methodology, including on any reliance interests implicated by such
methodology.
2.1 Statutory Authority
Authority for the Administrator to establish small business size
standards for Federal Government programs is the Small Business Act, 15
U.S.C 632 et seq. (the Act). Congress has periodically modified the
Act, but has not provided specific values for size standards for
Federal Government purposes, other than previously for agricultural
enterprises. With respect to general directions on how SBA should
establish small business size standards, the Act provides the
following:
15 U.S.C. 632
(a) Small Business Concerns
(1) In General--For the purposes of this Act, a small-business
concern, including but not limited to enterprises that are engaged in
the business of production of food and fiber, ranching and raising of
livestock, aquaculture, and all other farming and agricultural related
industries, shall be deemed to be one which is independently owned and
operated and which is not dominant in its field of operation.
(2) Establishment of Size Standards.--
(A) In General.--In addition to the criteria specified in paragraph
(1), the Administrator may specify detailed definitions or standards by
which a business concern may be determined to be a small business
concern for the purposes of this Act or any other Act.
(B) Additional Criteria.--The standards described in paragraph (1)
may utilize number of employees, dollar volume of business, net worth,
net income, a combination thereof, or other appropriate factors.
(C) Requirements.--Unless specifically authorized by statute, no
Federal department or agency (including the Administration when acting
pursuant to subparagraph (A)) may prescribe a size standard for
categorizing a business concern as a small business concern, unless
such proposed size standard--
(i) is proposed after an opportunity for public notice and comment;
(ii) provides for determining--
(I) the size of a manufacturing concern as measured by the
manufacturing concern's average employment based upon employment during
each of the manufacturing concern's pay periods for the preceding 24
months;
(II) the size of a business concern providing services on the basis
of the annual average gross receipts of the business concern over a
period of not less than 5 years;
(III) the size of other business concerns on the basis of data over
a period of not less than 3 years; or
(IV) other appropriate factors; and
(iii) is approved by the Administrator.
(3) Variation by Industry and Consideration of Other Factors.--When
establishing or approving any size standard pursuant to paragraph (2),
the Administrator shall ensure that the size standard varies from
industry to industry to the extent necessary to reflect the differing
characteristics of the various industries and consider other factors
deemed to be relevant by the Administrator.
(6) Proposed Rulemaking.--In conducting rulemaking to revise,
modify or establish size standards pursuant to this section, the
Administrator shall consider, and address, and make publicly available
as part of the notice of proposed rulemaking and notice of final rule
each of the following:
(A) a detailed description of the industry for which the new size
standard is proposed;
(B) an analysis of the competitive environment for that industry;
(C) the approach the Administrator used to develop the proposed
standard including the source of all data used to develop the proposed
rulemaking; and
(D) the anticipated effect of the proposed rulemaking on the
industry, including the number of concerns not currently considered
small that would be considered small under the proposed rulemaking and
the number of concerns currently considered small that would be deemed
other than small under the proposed rulemaking.
(7) Common Size Standards.--In carrying out this subsection, the
Administrator may establish or approve a single size standard for a
grouping of four-digit North American Industry Classification System
codes only if the Administrator makes publicly available, not later
than the date on which such size standard is established or approved, a
justification demonstrating that such size standard is appropriate for
each individual industry classification included in the grouping.
(8) Number of Size Standards.--The Administrator shall not limit
the number of size standards established pursuant to paragraph (2) and
shall assign the appropriate size standard to each North American
Industry Classification System Code.
15 U.S.C. 632(a)(2)(A) and id. 632(a)(2)(B) of the Act says ``the
Administrator may specify detailed definitions or standards by which a
business concern may be determined to be a small business concern'' and
may utilize factors such as ``number of employees, dollar volume of
business, net worth, net income, a combination thereof, or other
appropriate factors.'' 15 U.S.C. 632(a)(2)(C) refers to the procedures
for the setting of size standards by federal agencies (including SBA)
and id. 632(a)(3) provides that the Administrator ``shall ensure that
the size standard varies from industry to industry to the extent
necessary to reflect the differing characteristics of the various
industries and consider other factors deemed to be relevant''. This
authorizes the Administrator to consider, in addition to industry data,
other relevant factors, such as current economic conditions, impacts
size standards changes would have on small businesses, and public
comments when determining size standards.
The requirements for conducting rulemaking to establish, revise or
modify size standards are stated in 15 U.S.C. 632(a)(6). The
requirements for establishing a common size standard for a grouping of
industries are provided in 15 U.S.C. 632(a)(7). Finally, 15 U.S.C.
632(a)(8) directs the Administrator ``not limit the number of size
standards established . . . and shall assign the appropriate size
standard to each [NAICS] Code''. Along with the above broad statutory
requirements, the Act also directs the Agency to encourage competition
and to ensure that a fair proportion of total Federal purchases,
contracts, and property sales be placed with small business enterprises
(15 U.S.C. 631(a)). Congress went on to state that ``the preservation
and expansion of
[[Page 54098]]
such competition is basic not only to the economic well-being but to
the security of this Nation.'' Id.
Additionally, the National Defense Authorization Act for Fiscal
Year 2017 (Pub. L. 114-328), authorized the Administrator to establish
size standards for agricultural enterprises in the same manner as for
other industries and requires a rolling review of periodic updates.
Historically, the size standards for most agricultural industries were
established by statute.
2.2 Legislative History
The above statutory language provides the Administrator with broad
discretion in establishing, reviewing, or revising size standards.
Reading the legislative history of the Act provides further insight.
The requirement that a small business concern be ``independently owned
and operated'' requires SBA to define the size of a firm together with
its affiliates when calculating its size.\1\ Therefore, SBA must
consider not only the size of a firm but also the size of all of its
affiliates (both domestic and foreign) when establishing, reviewing, or
revising size standards and when determining its small business
eligibility for Federal Government programs.
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\1\ See Hearings on H.R. 4090 and H.R. 5141 before the Committee
on Banking and Currency of the U.S. House of Representatives, 83rd
Congress, 1st Session (1953), page 17.
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The Banking and Currency Committee recognized the ``impossibility
of attempting to write into law a rigid definition of small business.''
\2\ Therefore, section 3 of the bill defines a small business concern
in a flexible and realistic manner. The Committee did this ``because it
has become universally recognized that it is utterly impossible to
define small business rigidly in terms of number of employees, amount
of capitalization, or dollar volume of business.'' Id.
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\2\ See House Report No. 494, 83rd Congress, 1st Session (1953),
page 20.
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In 1957, the House Committee on Banking and Currency addressed how
to characterize a small business and stated that ``no single definition
may be expected to meet all requirements.'' Recognition of varying
situations motivated the Committee in drafting the present Small
Business Act to depart from rigid standards and leave the definition of
small business to administrative determination.\3\ That same report
explains that the origins of the present statutory requirement that the
Agency vary the size standards from industry to industry where number
of employees is used as the criteria was the result of the Agency's
then existing flat 500-employee rule for all government contracts.
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\3\ See House Report No. 555, 85th Congress, 1st Session, page
6.
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In September 2010, Congress passed the Jobs Act (``Jobs Act'')
(Pub. L. 111-240, 124 Stat. 2504; September 27, 2010), requiring SBA to
review all size standards every five years and make necessary
adjustments to reflect current industry and market conditions.
Specifically, the Jobs Act requires SBA to conduct a detailed review of
not less than one-third of the size standards during the 18-month
period beginning on the date of enactment of this Act and during every
18-month period thereafter, which shall include holding not less than
two public forums located in different geographic regions of the United
States.
In accordance with section 1661 for the National Defense
Authorization Act of Fiscal Year 2013 (``NDAA 2013'') (Pub. L. 112-239;
Jan. 2, 2013), SBA has relaxed the limitation on the number of small
business size standards. Specifically, section 1661 of NDAA 2013 states
``SBA cannot limit the number of size standards, and shall assign the
appropriate size standard to each industry identified by NAICS.''
Under section 1831 of the National Defense Authorization Act for
Fiscal Year 2017 (NDAA 2017) (Pub. L. 114-328; December 23, 2016),
Congress amended paragraph 3(a)(1) of the Act authorizing the
Administrator to establish size standards for agricultural enterprises
in the same manner as for other industries. The amendment also subjects
size standards for agricultural enterprises to the rolling review
procedures established under section 1344(a) of the Jobs Act.
Historically, the size standards for most agricultural industries were
established by statute.
The Small Business Runway Extension Act of 2018 (SBREA) (Pub. L.
115-324; December 17, 2018) amended section 3(a)(2)(C)(ii)(II) of the
Act, 15 U.S.C. 632(a)(2)(C)(ii)(II), to modify the requirements for
proposed small business size standards prescribed by an agency without
separate statutory authority to issue size standards. Specifically, the
SBREA changed the averaging period for calculating average annual gross
receipts for size standards of services firms from three years to five
years.
Section 863 of the National Defense Authorization Act for Fiscal
Year 2021 (NDAA 2021) (Pub. L. 116-283; January 1, 2021) changed the
averaging period for SBA's employee based size standards from 12 months
to 24 months. Section 863 of the NDAA 2021 amended two provisions of
section 3(a)(2) of the Act, which sets forth requirements for an agency
that would prescribe a proposed size standard. First, the NDAA 2021
provides that those requirements also apply to SBA when the agency acts
pursuant to the authority in section 3(a)(2)(A) for SBA to specify
small business definitions or size standards. Second, the NDAA 2021
amended section 3(a)(2)(C)(ii)(I) such that a proposed size standard
for a manufacturing concern must provide for determining the size of
the concern based on the employment during each of the concern's pay
periods for the preceding 24 months. Previously, the statute specified
the use of a 12-month period.
2.3 Regulatory History
Current small business size standards evolved from a limited number
of general size standards for broad industry groups or sectors to a
larger number of specific size standards based on individual
industries. This transition was recognition that different industries
had different characteristics, and thus warranted appropriate industry
specific size standards. Many of today's size standards continue at
levels established right after the SBA's inception, except that
receipts-based size standards have been increased for inflation over
the years.
Over the years, SBA has adopted a broad range of size standards--
manufacturing industry standards ranged from 250 employees to 1,500
employees; other industry size standards ranged from $0.10 million to
$47 million in average annual receipts. SBA establishes its size
standards for industries using the latest NAICS industry definitions,
developed by the Office of Management and Budget (OMB) in collaboration
with U.S. Census Bureau, other U.S. Federal Statistical Agencies, and
Statistical Agencies of Canada and Mexico. NAICS replaced the Standard
Industrial Classification (SIC) system, effective January 1, 1997. SBA
adopted NAICS as the basis for its table of size standards, effective
October 1, 2000 (65 FR 30836; May 15, 2000). OMB modifies or updates
NAICS every five years and SBA adopts the NAICS updates for its table
of size standards, effective October 1 of the same year. SBA has opted
to use October 1 because that is the start of the Federal Government's
fiscal year.
The 500-employee size standard for Federal contracting predates
SBA; it was used by the Reconstruction Finance Corporation and the
earlier Small War Plants Corporation, which was a World War II
Government contracting agency channeling Federal contracts to small
[[Page 54099]]
manufacturers. In 1957, the House Committee on Banking and Currency
observed that ``the standard of 500 or less employees originated in
World War II with several variations. For the want of a better
definition, the 500-employee rule generally gained acceptance in the
Government, although in many instances there was considerable
reluctance by many Government officials and members of Congress to
accept such a rigid formula.'' (See Senate Report No. 555, 85th
Congress, 1st Session, page 6.)
SBA adopted 500 employees as the size standard for manufacturing
industries at its 1953 inception; it has remained a size standard for
many industries until today and had long been considered the ``anchor''
size standard for employee-based size standards. In 1959, SBA's size
regulations distinguished between manufacturing and financial
industries. Specifically, the Agency adopted 250-employee, 500-
employee, and 1,000-employee size standards for its financial
assistance programs, but maintained the 500-employee size standard for
Federal contracting programs.
Generally, the Agency has used annual receipts as the measure of
size standards for nonmanufacturing industries. Soon after its
inception, SBA created size standards for nonmanufacturing based on
annual receipts rather than employees. In 1954, SBA established $1
million in average annual receipts as the size standard for
nonmanufacturing industries. Receipts based size standards were
established subsequently for other industries. They varied between
$0.30 million and $1 million for retail trade and services industries,
between $2 million and $5 million for wholesale trade industries, and
$5 million for construction industries. SBA has periodically increased
all receipts based size standards for inflation. With the periodic
inflation adjustments, the most common receipts based size standard of
$1 million has increased to $9 million today. The $1 million level and
its inflation-adjusted equivalents had long been considered the
``anchor'' size standard for industries with receipts based size
standards.
By 1963, SBA receipts based size standards were as follows: $1
million for retail trade industries; $1 million for services
industries; $5 million for wholesale trade industries; and $7.5 million
for construction industries. SBA continued using two sets of size
standards for manufacturing industries--250 employees to 1,000
employees for SBA financial programs, but generally 500 employees for
Federal contracting programs.
From 1963 to 1975, many manufacturing size standards were increased
from 500 employees to 750 employees or 1,000 employees. Similarly, some
services industries, such as engineering and janitorial services were
broken into separate industries, with size standards of $5 million and
$3 million, respectively.
In 1975, SBA adopted a general increase to its monetary based size
standards for inflation (40 FR 32824; August 5, 1975). As a result, the
new size standards were $2 million for retail trade and services
industries, $12 million for general construction, and $5 million for
specialty trade construction. Employee based standards remained
unchanged.
After a series of public notices in the Federal Register from 1980
to 1983 with an intent to comprehensively revise its size standards,\4\
the Agency adopted in a final rule a detailed list of size standards
for industries as defined under the SIC system (49 FR 5024; February 9,
1984). Generally speaking, the size standards framework the Agency
followed until the first five-year comprehensive size standards review
under the Jobs Act was put in place in 1984.
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\4\ These include: (1) Advance Notice, 45 FR 15442; March 10,
1980; (2) Notice of Public Hearings, 45 FR 23704; April 8, 1980; (3)
Public Notice, 45 FR 59587; September 10, 1980; (4) Second Advance
Notice, 47 FR 18992; May 3, 1982; (5) Proposed rule, 48 FR 20560;
May 6, 1983.
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In 1984, to simplify procurement procedures, SBA adopted a single
size standard of 500 employees for all wholesale trade industries, for
both procurement and SBA financial programs (49 FR 5024; February 9,
1984). Before that, the wholesale trade industries had a 500-employee
size standard for Federal procurement and three levels of receipts
based standards ($9.5 million, $14.5 million, and $22 million) for
SBA's financial programs. In 1986, SBA amended its size standards for
the wholesale trade industries from 500 employees to 100 employees for
all SBA financial programs (51 FR 25189; July 11, 1986), while it
retained 500-employee size standard for Federal procurement.
In 1992, SBA proposed, along with an inflation adjustment, a
reduction in the number of size standard levels from more than forty
different levels to nine receipts based size standards and five
employee based size standards (57 FR 62515; December 31, 1992). SBA
withdrew the proposed rule on February 19, 1993 (58 FR 9131) and re-
published it on September 2, 1993 (58 FR 46573). Although public
comments overwhelmingly accepted the fixed size standards approach, the
proposed levels seemed arbitrary and produced large variations in
changes to standards. SBA believed it could not justify such large
variations, and therefore, limited the final rule to adjusting the then
existing receipts based size standards for inflation (59 FR 16513;
April 7, 1994).
In March 2004, SBA proposed to simplify and restructure size
standards by establishing all size standards based on number of
employees (69 FR 13130; March 19, 2004). For a number of industries,
however, an employee based size standard could result in businesses
with very high receipts but few employees to qualify as small. There
were other skewed outcomes as well, and SBA, therefore, also proposed a
maximum receipts size standard along with an employee size standard for
certain industries. Public comments showed that for some industries the
proposed employee based standards were either too low or did not serve
as a suitable measure of business size. Rather than issuing a revised
proposed rule with adjusted size standards, SBA decided to seek
additional input from the public.
Accordingly, in December 2004, the Agency issued an Advance Notice
of Proposed Rulemaking (ANPRM) (69 FR 70197; December 3, 2004). It
sought comments on ten specific issues that the public had raised in
response to the March 2004 proposed rule. SBA did not make further
proposals, but only sought public comment on whether and how it should
consider the following: (1) Approaches to simplification of size
standards; (2) Calculation of number of employees; (3) Use of receipts
based size standards; (4) Designation of size standards for Federal
procurements; (5) Establishment of size standards solely for Federal
procurement; (6) Establishment of tiered size standards; (7)
Simplification of small business status and affiliation with other
businesses; (8) Joint ventures and small business eligibility; (9)
Grandfathering of currently eligible small businesses; and (10) Impact
of SBA size standards on the regulations of other Federal agencies. SBA
received several thousand comments on these issues, but no consensus.
In 2007, SBA began a comprehensive review of all size standards to
determine whether the existing size standards were consistent with
current data, and to revise them, when necessary. In addition, on
September 27, 2010, the President of the United States signed the Small
Business Jobs Act of 2010 (Jobs Act), Public Law 111-240, 124 Stat.
[[Page 54100]]
2504, Sept. 27, 2010. The Jobs Act directs SBA to conduct, at least
every five years, a detailed review of all size standards and to make
appropriate adjustments to reflect market conditions. SBA completed the
first five-year review of size standards in early 2016 and the second
five-year review of size standards in early 2023. SBA is currently int
the midst of the next (third) five-year review. Across the first two
reviews, SBA only decreased three size standards out of more than
1,000, in order to exclude potentially dominant firms from being
considered small. The rest were either raised based on an analysis of
industry features or maintained because of SBA policy decisions of not
lowering size standards in both reviews.\5\
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\5\ Size standards in the first five-year review were not
lowered due to lingering impacts of the 2007-2009 Great Recession.
Size standards in the second five-year review were not lowered due
disruptions because of the COVID-19 Pandemic.
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SBA modified its method for calculating average annual receipts
used to prescribe size standards for small businesses (84 FR 66561;
December 5, 2019). Specifically, in accordance with the Small Business
Runway Extension Act of 2018, SBA changed its regulations on the
calculation of average annual receipts for all of SBA's receipts based
size standards, and for other agencies' proposed receipts based size
standards, from a three-year averaging period to a five-year averaging
period, outside of the SBA Business Loan and Disaster Loan Programs.
In accordance with NDAA 2021, SBA adopted a 24-month average to
calculate a business concern's number of employees for eligibility
purposes in all of SBA's programs (87 FR 34094; June 6, 2022). SBA also
permitted business concerns in its Business Loan, Disaster Loan, Surety
Bond, and Small Business Investment Company (SBIC) Programs to use a
five-year averaging period, in addition to the existing three-year
averaging period, for the purposes of calculating average annual
receipts.
Currently, the most prevalent size standards are $9 million in
annual receipts for Retail Trade and Services, $45 million for General
Construction, $19 million for Special Trade Construction, 100 employees
to 250 employees for Wholesale Trade for all Federal programs except
for Federal procurement where it is 500 employees under the
nonmanufacturer rule, and 500 employees for manufacturing industries.
Monetary based size standards range from $2.25 million in annual
receipts for some Agricultural enterprises to $47 million in annual
receipts for some Retail Trade and some services industries. Similarly,
employee based standards range from 100 employees for Fuel Dealers to
1,500 employees for some Manufacturing, Telecommunications, and
Transportation industries. With exceptions of wholesale and retail
trade industries, uniform size standards are now in place for all SBA's
programs. Wholesale and retail trade industries have a singular 500-
employee size standard for Federal procurement purposes under the
nonmanufacturer rule and industry-specific size standards that apply to
SBA's financial and other non-procurement Federal programs.
2.4 2024 Size Standards Methodology
On September 12, 2024, SBA adopted the current size standards
methodology (89 FR 74109). It incorporated minor changes from the
previously adopted version from 2019 (84 FR 14587; April 11, 2019),
with the exception of inflation adjustments for monetary based size
standards and adjustments to the federal contracting disparity
calculations. The 2024 methodology used seven factors to determine size
standards: the simple average firm size, weighted average firm size,
average assets per firm, four firm concentration ratio, Gini
coefficient of industry revenue, and two disparity measures of federal
contracting for any industries with more than $20 million in federal
contracts. For the first five measures, SBA compared an industry's
factor to that of a reference group of other industries to arrive at a
factor specific size standard. For the federal contracting disparity
measures, the methodology proposed an increase if small businesses were
significantly below parity in terms of the number of federal contracts
or contracting dollars. Once each factor specific size standard had
been calculated, all seven were averaged together to arrive at a final
size standard. Most size standards corresponded to a NAICS 6-digit
industry, though there were some alternative size standards for
specific subindustries which are heavily used in federal contracting.
Lastly, while 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.\6\
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\6\ Small Business Size Standards: Monetary-Based Industry Size
Standards (90 FR 41168 August 22, 2025)
---------------------------------------------------------------------------
3. Grouping Industries
Since 2000, SBA has used the North American Industrial
Classification System (NAICS) 6-digit industry codes as a basis for its
table of small business size standards, replacing the older Standard
Industrial Classification (SIC) (65 FR 30836; May 15, 2000). Since
then, the Office of Management and Budget (OMB) has issued five
revisions to NAICS--NAICS 2002 (66 FR 3826; January 16, 2001), NAICS
2007 (71 FR 28532; March 16, 2006), NAICS 2012 (76 FR 51240; August 17,
2011), NAICS 2017 (81 FR 52584; August 8, 2016), and the latest 2022
(86 FR 72277; December 21, 2021) revisions. To ensure that size
standards are based on latest industry definitions, SBA updates its
table of size standards following the release of a new NAICS revision
from OMB.
As of the most recent NAICS revision in 2022 there are 1,012 unique
industries identified,\7\ with small businesses operating in 980 of
those.\8\ With this level of disaggregation, many of the distinctions
made are not relevant to businesses, except as it relates to their
small business status. For example, there are four different NAICS 6-
digit codes for Restaurants: 722511 (Full-Service Restaurants), 722513
(Limited-Service Restaurants), 722514 (Cafeterias, Grill Buffets, and
Buffets), and 722515 (Snack and Nonalcoholic Beverage Bars). Choosing
which code is correct for most restaurants might be straightforward,
but there are edge cases which could create unnecessary confusion. Some
restaurants may serve customers with a buffet for lunch so that
customers can eat more quickly before returning to work, but as a
traditional sit-down restaurant for dinner. Under the current size
standards, such a restaurant would have to determine their industry by
looking at which type of service generates the majority of its
revenue--a relevant distinction as buffets have a size standard that is
nearly 3 times higher than full-service restaurants ($34 million in
receipts vs. $11.5 million).\9\
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\7\ 2022 NAICS Manual--Office of Management and Budget.
\8\ Small businesses cannot operate in NAICS 491110 (Postal
Service), 521110 (Monetary Authorities--Central Bank), 814110
(Private Households), and 29 industries in NAICS Sector 92 (Public
Administration).
\9\ 13 CFR 121.201.
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SBA size standards are used by a wide range of practitioners, many
of whom do not have a nuanced understanding of the nearly 1,000 NAICS
6-digit Industries containing small businesses. The SBA is proposing to
establish certain size standards at the NAICS 4-digit Industry Group
instead of at a lower 5-digit or 6-digit Industry level for industries
as allowed under 15 U.S.C. 632(a)(7), where appropriate. Grouping
[[Page 54101]]
at the 4-digit level will allow small businesses to more easily
determine where their business fits within the federal government
ecosystem, in turn providing them an easier entry to federal
contracting and other services that may be available to them.
Additionally, grouping at the 4-digit level will help prevent the issue
of contracting officers at federal agencies choosing the improper
industry and corresponding size standard for contracts up for bid,
which has in turn restricted opportunities for small businesses that
should have been eligible to compete SBA believes setting size
standards at the 4-digit level where appropriate will thus foster a
more competitive environment where small businesses can earn revenue
and grow.
The SBA's proposed justification for grouping industries at the 4-
digit level is based on two criteria with a single size standard chosen
for industries if either criterion is met. In such instances, SBA
believes that a single size standard is appropriate for all industries
within such 4-digit level. When neither criterion is met, the SBA
believes a single size standard at the 4-digit level is inappropriate
and proposes to use the 5-digit Industry as the level for size standard
classification. Because the NAICS framework is hierarchical, size
standards proposed at the 4-digit Industry Group will continue to
ensure complete coverage of small businesses as each 6-digit Industry
is nested inside a single 4-digit Industry Group.\10\
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\10\ For example, the NAICS Industry Group 3352 Household
Appliance Manufacturing contains two 6-digit Industries: 335210
Small Electrical Appliance Manufacturing and 335220 Major Household
Appliance Manufacturing. Because the SBA is proposing a unified size
standard for the Industry Group it will apply to both Industries.
---------------------------------------------------------------------------
The first is to see if the 4-digit NAICS Industry Group is at or
below the lowest level of the hierarchy where the United States, Canada
and Mexico are in agreement. Because the three countries are in
agreement on these industry definitions but not the lower industries,
there is an understanding that these industries are similar enough for
cross-country purposes. Further delineation is therefore only used
within the United States, and as such the distinctions are more
nuanced. Take Oil and Gas Extraction (NAICS 2111), one of the Industry
Groups where the three countries have chosen not to delineate further.
The United States has chosen to further break the Industry Group down
into Crude Petroleum Extraction (NAICS 211120) and Natural Gas
Extraction (NAICS 211130). While the two primary commodities produced
are distinct, both are often collocated in the same field, leading many
firms to produce both. As such the 2022 NAICS manual includes a cross-
reference for how to classify establishments.\11\ Of the 297 Industry
Groups which may include small businesses, 189 are at or below the
lowest level of the NAICS hierarchy. Additionally, all 5-digit NAICS
Industries satisfy this criterion.
---------------------------------------------------------------------------
\11\ The cross-reference is as follows: ``combined activities of
crude petroleum and natural gas extraction--are classified in
Industry Group 2111, Oil and Gas Extraction, based on the primary
activity of the establishment'' 2022 NAICS Manual--Office of
Management and Budget.
---------------------------------------------------------------------------
The second is to see if the cross-references in the 2022 NAICS
manual create a complete graph of 5-digit industries within a 4-digit
industry group. This means that every 5-digit industry is reachable,
either directly or indirectly through a series of cross-references. The
most common way this is achieved is by one or more 5-digit industries
sharing cross-references with every other industry. Figure 1 shows such
an example in Building Finishing Contractors (NAICS 2383), where the 5-
digit Industry Other Building Finishing Contractors (23839) references
the other five industries. For only two industry groups, Beverage
Manufacturers (NAICS 3121) and Basic Chemical Manufacturers (NAICS
3251), is a longer path requiring two intermediary 5-digit industries
for some pairs of industries. Figure 2 shows the cross-references for
Beverage Manufacturers for reference. Of the 297 Industry Groups which
include small businesses, 263 contain a complete graph of 5-digit
industries.
[[Page 54102]]
Figure 1: Cross-References for the Building Finishing Contractors
Industry Group (NAICS 2383)
[GRAPHIC] [TIFF OMITTED] TP20AU26.049
[[Page 54103]]
Figure 2: Cross-References for the Beverage Manufacturing Industry
Group (NAICS 3121)
[GRAPHIC] [TIFF OMITTED] TP20AU26.050
When used in conjunction, the two proposed criteria indicate that
276 Industry Groups meet the criteria to use Industry Group, while 21
do not meet the two-part test being utilized. Of those which meet
Industry Grouping criteria, 176 satisfy both criteria, 13 meet the
cross-country criterion, and 87 meet the cross-reference criterion. The
results for each industry group are shown in Table 1 along with the
number of 6-digit NAICS industries that are contained in each. 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.
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BILLING CODE 8026-09-C
As OMB issues new updates to NAICS, SBA will continue to match its
size standards definition to the latest version. When SBA proposed to
replace SIC with NAICS 1997 as the basis of industry definitions for
its table of small business size standards, it established a set of
guidelines or rules to convert the size standards from industries under
SIC to those under NAICS (64 FR 57188; October 22, 1999). The
guidelines aimed to minimize the impact of applying a new industry
classification system on SBA's size standards and on small businesses
that qualified as small under the SIC based size standards. SBA
received no negative comments against the proposed guidelines. SBA
published the final rule on May 15, 2000 (65 FR 30386) (corrected on
September 5, 2000 (65 FR 53533)) adopting the resulting table of size
standards based on NAICS 1997, as proposed. To be consistent, SBA also
applied the same guidelines when it updated its table of size standards
to adopt NAICS 2002 (67 FR 52597; August 13, 2002), NAICS 2007 (72 FR
49639; August 29, 2007), NAICS 2012 (77 FR 49991; August 20, 2012),
NAICS 2017 (82 FR 44886; September 27, 2017), and NAICS 2022 revisions
(87 FR 59240; September 29, 2022). In all those updates, SBA received
no adverse comments on using those guidelines, or on the resulting
changes to the size standards. Those guidelines are shown below in
Table 1, General Guidelines to Convert Size Standards from Old NAICS to
New NAICS Industries.
BILLING CODE 8026-09-P
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[[Page 54128]]
[GRAPHIC] [TIFF OMITTED] TP20AU26.075
BILLING CODE 8026-09-C
In addition to the above general guidelines, in cases where a new
industry group or industry is formed by merging multiple industry
groups or industries or their parts with substantially different levels
or different measures of size standards, SBA also examines the relevant
latest industry and Federal procurement data to determine an
appropriate size standard for the new industry group or industry.
4. Selection of Size Measure
SBA has primarily used two measures of business size for its size
standards--receipts and number of employees.\12\ Both are statutorily
required for businesses depending on business activity. Businesses
providing services are required to have a receipts based
[[Page 54129]]
size standard,\13\ and those in manufacturing are required to have an
employment based size standard.\14\ In addition, the SBA is afforded
the authority to use additional factors as appropriate. For all but one
industry, Fishing (NAICS 1141), where Congress has delegated the
determination to SBA, SBA proposes to use an employment based size
standard. SBA's choice is intended to minimize the number of businesses
that fluctuate between small and large each year, as such fluctuation
makes it more difficult for businesses to strategically plan, for
example, their capital and contracting opportunities, and for federal
agencies to likewise evaluate what businesses may be eligible to bid on
small business contracts on a year-over-year basis. SBA believes this
goal is achievable by deferring to employment-based size standards over
receipts where possible because of the lower volatility in employment
year to year as compared to receipts.\15\ The Act itself reflects the
greater stability of employment relative to receipts, as receipt based
size standard determinations are based on the average receipts over
five years, while employment based size on average employment over two
years.
---------------------------------------------------------------------------
\12\ Besides receipts and employees, the current size standards
include two other measures for determining size standards. For
Commercial Banking (NAICS 522110), Credit Unions (NAICS 522130),
Credit Card Issuing (NAICS 522210), and Savings Institutions and
Other Depository Credit Intermediation (NAICS 522180) the size
standard is defined as $850 million in total assets, and was chosen
because it was ``the most commonly accepted measure of bank size''
in 1984 (49 FR 40399). For Petroleum Refineries (NAICS 324110) the
size standard is defined both in terms of employees and barrels of
oil refined per day, again because it was considered a better
indicator of size for a single petroleum refinery (57 FR 542). SBA
is proposing to replace this standard with just an employment number
because employment requires less adjustment as productivity
improves. For example, 1992 SBA has raised the barrels of oil part
of the size standard 3 times (57 FR 18808; May 1, 1992, 68 FR 15047;
March 28, 2003, and 81 FR 4469; January 26, 2016).
\13\ 15 U.S.C. 632(a)(2)(C)(ii)(II).
\14\ 15 U.S.C. 632(a)(2)(C)(ii)(I).
\15\ Across the entire economy, the variation in total
employment is just 44 percent of the variation in total real output
(Federal Reserve Economic Data--St. Louis Federal Reserve Bank)
---------------------------------------------------------------------------
There are other additional benefits to deferring to employment-
based size standards where available. First, greater use of employment-
based size standards should also benefit small Federal contractors, as
the act of winning a contract will not by itself force a firm to
transition into a large business. Second, it will put businesses in
high cost of living areas on equal footing with those in low cost of
living areas, as high input costs create greater disparities in
receipts across the country than employment. For example, restaurants
in Manhattan, New York earn $120 thousand in receipts per employee,
while those in Manhattan, Kansas earn just $49 thousand.\16\ Lastly,
employment-based size standards are robust to both inflation and
productivity growth and thus require less frequent updating by SBA.
During the periods between adjustments, some businesses lose their
small business status only to regain it upon the adjustment. In its
most recent rule increasing monetary size standards for inflation, for
example, 17,713 firms were expected to regain small businesses status
as a result of the rule.\17\
---------------------------------------------------------------------------
\16\ According to the 2022 Statistics of U.S. Businesses.
Manhattan, New York number is taken from the receipts and employment
in the Food Services and Drinking Places Subsector (NAICS 722) for
New York County, New York, while the Manhattan, Kansas number is
taken from the receipts and employment in the same subsector for
Riley County, Kansas.
\17\ 88 FR 46048.
---------------------------------------------------------------------------
SBA considered leaving size standards receipts-based where SBA has
the discretion to choose the appropriate size standard, but elected not
to do so for the reasons discussed above. In deciding whether to shift
such size standards from receipts-based to employment-based, SBA
considered the potential costs of doing so, including regulatory
familiarization. SBA determined that the benefits outweighed the costs
and is thus proposing such shifts.
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. In particular, for all but one
exception, the proposed size standards outlined in the accompanying
Notice of Proposed Rulemaking for each industry are larger than the
exception under that industry. None of the firms using these exemptions
are expected to lose small business status as a result of the proposed
changes, other than potentially Environmental Remediation Services an
exception to NAICS 56291 which currently has an employee based size
standard. The proposed methodology would result in a size standard for
NAICS 5629 and subsequent NAICS at the 5 and 6 digit level at $113
million in receipts. SBA requests comment on any impact in that
exception, as well as on whether any other exceptions for federal
contracting are needed under the new methodology and should remain.
To identify industry groups and industries appropriate to
transition to employment based size standards, the SBA must first
determine whether receipts-based size standards are required under 15
US.C. 632(a)(2)(C)(ii)(II). The SBA proposes to do this by considering
whether the industry group or industry is predominantly service-
oriented by, in turn, considering whether the industry group or
industry is focused on the transfer of ownership or practical control
of a tangible item. Regardless of the magnitude of the labor investment
in the industry, the focus here is on the contract and the product
provided to the customer. To make this determination, SBA is using a
three-step process for each industry group or industry considered.
First, is to identify what kind of physical objects are being
transferred by an industry group or industry. Second is to determine if
the industry group or industry primarily exists to transfer such
objects. Third is to determine if ownership or long-term practical
control of the object is being transferred. Only if all three
components of the test are satisfied is an industry group or industry
considered a non-service. The test is laid out in Figure 3 below.
[[Page 54130]]
Figure 3: Test for Identifying Service-Based Industry Groups
[GRAPHIC] [TIFF OMITTED] TP20AU26.076
To illustrate how the test works, the SBA has provided examples of
industry groups which fail each specific part of the test and one which
satisfies all three to be considered other than service. An industry
group which would fail the first test (are physical objects
transferred) is Elementary and Secondary Schools (NAICS 6111). The
industry group provides knowledge to children with little to no
physical objects given. An industry group which would fail the second
test (are physical objects the focus of business) is Legal Services
(NAICS 5411). The industry group does provide physical objects such as
contract documents, but legal firms primarily offer their legal
expertise which is intangible. An industry group which would fail the
final test (is ownership or control transferred) is General Freight
Trucking (NAICS 4841). This industry is primarily focused on moving
objects around, however it does so without a change in ownership.
Trucking firms do not typically purchase what they are hauling to then
resell it upon arriving at their destination, but instead move goods on
a contract basis. Finally, an industry group which satisfies all three
parts is Oil and Gas Extraction (NAICS 2111). In it, oil and gas is
brought up out of the ground after which it is sold and ownership is
transferred.
---------------------------------------------------------------------------
\18\ Five other industry groups: Automotive Dealers (NAICS
4411), Nonscheduled Air Transportation (NAICS 4812), Other Pipeline
Transportation (NAICS 4869), Sound Recording Industries (NAICS
5122), and Web Search Portals, Libraries, Archives, and Other
Information Services (NAICS 5192) have industries with employment
based size standards currently producing the majority of receipts
and are given an employment based size standard based on that
criteria. Using a similar test the one industry with a mix of asset
and receipt based size standards, Nondepository Credit
Intermediation (NAICS 5222) is given a receipts based size standard.
---------------------------------------------------------------------------
As the SBA has not previously made a systematic determination of
whether an industry group or industry can be classified as other than
service, it evaluated all 192 industry groups and industries which
currently have a receipts based size standard and 2 NAICS industry
groups with a mix of employment and receipts based size standards where
the industries with an employment based size standard generated a
minority of total receipts.\18\ Of these, the SBA is proposing that 66
can be classified as other than service, and proposes that 65 to
transition to employment based on the test described above. Regarding
the one remaining industry group, Fishing (NAICS 1141), the SBA is
proposing to keep as receipts based due to the heavy use of independent
contractors rather than employees to work on commercial fishing boats.
Based on a combination of data from the Statistics of U.S. Businesses
and the Nonemployer Statistics, the SBA found that 57 percent of
receipts in the industry group were generated by nonemployers, far
higher than any other industry group with a proposed employment based
size standard. An explanation for each is provided in Table 3. SBA
requests comment on such transitions, including on whether a receipts-
based size standard based on the methodology herein is more appropriate
for any industries or industry groups.
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BILLING CODE 8026-09-C
The effect of these changes is an increase in the number of
employment based size standards. Of the 338 industry groups and
industries with size
[[Page 54139]]
standards 208 are proposed to have an employment based size standard,
129 are proposed to have a receipts based size standard, and one (NAICS
5221 Depository Institutions) has an asset based size standard as seen
in Table 2. Many would transition to an employment based size standard
either from a receipts based one (64 industries), or a mix of receipts
and employment based (6 industries).\19\ The proposed size standard
determination for all industries can be found in Table A in the
Appendix.
---------------------------------------------------------------------------
\19\ Industries with a mix of size standards are due to the
current size standards being defined at the 6-digit NAICS level
while certain proposed size standards are defined at the 4-digit
NAICS level. In those cases some 6-digit industries had a receipts
based size standard while others had employment based size
standards.
[GRAPHIC] [TIFF OMITTED] TP20AU26.085
5. Data Sources
Calculating small business size standards as laid out in this
proposed methodology requires data from many sources. For 311 out of
338 industry groups and industries, 8 data sources were used, while for
the remaining 27 a special data source is needed due to specific data
needs that are not covered in the main data sources. Some of these
coverage gaps are due to private firms outside of the general sources,
such as farms and railroads, while for others the gaps are due to a
significant government presence in industry groups such as utilities,
urban transportation, and education. Because of these gaps an
additional 14 data sources are used. All the data sources used are
produced by Federal agencies, publicly accessible, cited, and discussed
below. All are presumed to be from 2022 unless mentioned otherwise.
Because of changes in size standards factors, few data sources are
repeated from the 2024 Methodology.
5.1 General Industry Data
Statistics of U.S. Businesses \20\--employee counts and receipts by
state and industry group or industry from this data source are used to
calculate national industry size.
---------------------------------------------------------------------------
\20\ Statistics of U.S. Businesses--Census Bureau.
---------------------------------------------------------------------------
Nonemployer Statistics \21\--establishment counts and receipts by
state and industry group or industry from this data source are used to
calculate national industry size. Additionally, total establishment
counts by county and industry group or industry from this data source
in 2023 are used in the calculation of the number of geographic markets
for an industry group or industry.
---------------------------------------------------------------------------
\21\ Nonemployer Statistics--Census Bureau.
---------------------------------------------------------------------------
County Business Patterns \22\--total employee counts by county and
industry group or industry from this data source in 2023 are used in
the calculation of the number of geographic markets for an industry
group or industry.
---------------------------------------------------------------------------
\22\ County Business Patterns--Census Bureau.
---------------------------------------------------------------------------
County Gazetteer Files \23\--county latitudes and longitudes from
this data source are used in estimating the approximate location of
suppressed employment and nonemployer establishments at the county-
industry level using a Heckman selection model. This process is part of
the calculation of the number of geographic markets for an industry
group or industry.
---------------------------------------------------------------------------
\23\ Gazetteer Files--Census Bureau.
---------------------------------------------------------------------------
County Population Totals \24\--2023 county population from this
data source is used the calculation of the number of geographic markets
for an industry in two ways. First, in estimating the approximate
location of suppressed employment and nonemployer establishments at the
county-industry level using a Heckman selection model. And second, in
calculating the geographic disparity of an industry group or industry.
---------------------------------------------------------------------------
\24\ County Population Totals--Census Bureau.
---------------------------------------------------------------------------
American Community Survey Commuting Flows \25\--county to county
commuting flows from this data source is used to agglomerate counties
into larger areas for the purposes of calculating the number of
geographic markets for an industry group or industry. This data is
based on the 2016-2020 American Community Survey and is the most
recently available.
---------------------------------------------------------------------------
\25\ American Community Survey Commuting Flows--Census Bureau.
---------------------------------------------------------------------------
[[Page 54140]]
County Adjacency File \26\--adjacency information from this data
source is used to ensure that only contiguous geographic areas are
adjoined when counties are agglomerated into larger areas in the
process of calculating the number of geographic markets for an industry
group or industry. This data is from 2023.
---------------------------------------------------------------------------
\26\ County Adjacency File--Census Bureau.
---------------------------------------------------------------------------
Use of Commodities by Industry Table \27\--exports, imports, and
output by industry group or industry from this data source are used to
adjust national industry size for exports and imports. This data is
from 2017 and is the most recent available for the most detailed
version.
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\27\ Use of Commodities by Industry Table--Bureau of Economic
Analysis.
---------------------------------------------------------------------------
5.2 Industry Specific Data
Census of Agriculture \28\--employee counts from this data source
are used in place of those from the Statistics of U.S. Businesses
(SUSB) and Nonemployer Statistics (NES) for 17 farming industry groups
and industries. Additionally, 11 farming industry groups or industries
are combined in the Census of Agriculture. Their employment is split in
proportion to the amount of receipts generated in each industry group
or industry as a proportion of all receipts.
---------------------------------------------------------------------------
\28\ USDA--National Agricultural Statistics Service--Census of
Agriculture.
---------------------------------------------------------------------------
Annual Electric Power Industry Report Form EIA-861 \29\--total
revenue and private industry revenue from this data source is used in
combination with data from Form EIA-923 discussed below to adjust SUSB
private sector employment for publicly owned electricity distribution
in the Electric Power Generation, Transmission and Distribution
industry (NAICS 2211). Around 12.1% of electricity is distributed by
publicly owned sources. The two values for distribution and generation
are averaged to upwardly adjust revenue and employment accordingly.
---------------------------------------------------------------------------
\29\ Annual Electric Power Industry Report Form EIA-861--Energy
Information Administration.
---------------------------------------------------------------------------
Annual Electric Power Industry Report Form EIA-923 \30\--total net
generation and private industry net generation from this data source is
used in combination with data from Form EIA-861 discussed above to
adjust SUSB private sector employment for publicly owned electricity
generation in the Electric Power Generation, Transmission and
Distribution industry (NAICS 2211). Around 8.0% of electricity is
generated from publicly owned sources. The two values for distribution
and generation are averaged to upwardly adjust revenue and employment
accordingly.
---------------------------------------------------------------------------
\30\ Annual Electric Power Industry Report Form EIA-923--Energy
Information Administration.
---------------------------------------------------------------------------
Natural Gas Summary \31\--average prices and consumption of natural
gas from this data source are used to calculate the total revenue of
Natural Gas Distribution (NAICS 2212) including both private and
government owned entities. Natural gas delivered for electric power
generation is excluded as it is primarily delivered via pipeline which
is a different industry (NAICS 4861). The number of employees in the
industry group from SUSB is then increased proportionally to the ratio
of revenue from this source and SUSB.
---------------------------------------------------------------------------
\31\ U.S. Natural Gas Summary--Energy Information Agency.
---------------------------------------------------------------------------
Data and Information Used by WaterSense \32\--average prices for
water in 2024 from this data source is used in calculating the total
revenue of all water and sewage systems (NAICS 2213). It is combined
with data from the United States Geological Survey discussed below to
estimate the total revenue of water and sewage systems. Total
employment of all water and sewage systems is estimated by multiplying
the employment at privately owned water and sewage systems by the ratio
of total revenue to private revenue reported in SUSB.
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\32\ Data and Information Used by WaterSense--Environmental
Protection Agency.
---------------------------------------------------------------------------
Estimated Use of Water in the United States 2015 \33\--average
daily water use by public water systems in 2015 from this data source
is used in calculating the total revenue of all water and sewage
systems (NAICS 2213). It is combined with data from the Environmental
Protection Agency discussed above to estimate the total revenue of
water and sewage systems. Total employment of all water and sewage
systems is estimated by multiplying the employment of privately owned
water and sewage systems by the ratio of total revenue to private
revenue reported in SUSB.
---------------------------------------------------------------------------
\33\ Estimated Use of Water in the United States in 2015--U.S.
Geological Survey.
---------------------------------------------------------------------------
Railroad Employment and Compensation \34\--employee counts for
Class I line-haul railroads, Non-Class I line-haul railroads and
switching & terminal companies, and the National Railroad Passenger
Corporation (Amtrack) are used to calculate the total employment for
Rail Transportation (NAICS 4821). Other Commuter railroads, Car-loan
companies, Labor organizations, and Miscellaneous employees are
excluded as they fall outside the industry group.
---------------------------------------------------------------------------
\34\ Employment and Compensation--Railroad Retirement Board.
---------------------------------------------------------------------------
Single Summary of Transit Report \35\--receipts for publicly owned
Urban Transit Systems entities (NAICS 4851) from this data set are
added to the privately owned numbers from SUSB to arrive at the total
receipts for the entire industry group.
---------------------------------------------------------------------------
\35\ 2022 Single Summary of Transit Report--Federal Transit
Administration.
---------------------------------------------------------------------------
Quarterly Banking Profile \36\--data on assets and receipts of
federally insured banks and other savings institutions from this data
set are combined with similar information about credit unions from the
National Credit Union Administration's Quarterly Data Summary Reports
discussed below to create the asset-based size standard for Depository
Credit Intermediation (NAICS 5221).
---------------------------------------------------------------------------
\36\ Quarterly Banking Profile--Federal Deposit Insurance
Corporation.
---------------------------------------------------------------------------
Quarterly Data Summary Report \37\--data on assets and receipts of
federally insured credit unions from this data set are combined with
similar information about banks and other savings institutions from the
Federal Deposit Insurance Corporation's Quarterly Banking Profile
discussed above to create the asset-based size standard for Depository
Credit Intermediation (NAICS 5221).
---------------------------------------------------------------------------
\37\ Quarterly Data Summary Report--National Credit Union
Administration.
---------------------------------------------------------------------------
Private Pension Plan Bulletin \38\--data on administrative expenses
to pension plans from this data source is added to the contributions to
group health plans discussed below to find the revenue for Insurance
and Employee Benefit Funds (NAICS 5251).
---------------------------------------------------------------------------
\38\ Private Pension Plan Bulletin--Employee Benefits Security
Administration.
---------------------------------------------------------------------------
Group Health Plans Report \39\--data on administrative expenses to
group health plans from this data source is added to the contributions
to pension plans discussed above to find the revenue for Insurance and
Employee Benefit Funds (NAICS 5251).
---------------------------------------------------------------------------
\39\ Group Health Plans Report--Employee Benefits Security
Administration.
---------------------------------------------------------------------------
Common Core of Data America's Public Schools \40\--data on receipts
for public Elementary and Secondary Schools (NAICS 6111) from this data
source are used. The public school receipts are then added to the
private school receipts from SUSB.
---------------------------------------------------------------------------
\40\ Common Core of Data America's Public Schools--National
Center for Education Statistics.
---------------------------------------------------------------------------
Integrated Postsecondary Education Summary Tables \41\--data on
receipts for publicly owned Junior Colleges (NAICS 6112) and Colleges,
Universities, and
[[Page 54141]]
Professional Schools (NAICS 6113) from this data source are used.
Junior Colleges are denoted by being institutions with a typical degree
plan of less than 4 years, while Colleges, Universities, and
Professional Schools have a typical degree plan of 4 years or more. The
public school receipts are then added to the private school receipts
from SUSB.
---------------------------------------------------------------------------
\41\ Integrated Postsecondary Education Summary Tables--National
Center for Education Statistics.
---------------------------------------------------------------------------
6. Calculation of SBA Size Standards
This section lays out the method by which SBA proposes to calculate
size standards for each industry group or industry. First, it explains
how the three inputs of average market size are calculated using the
data sources cited above. These are: national industry size, number of
geographic markets, and an adjustment factor for net imports. These
three inputs are combined according to the following equation:
[GRAPHIC] [TIFF OMITTED] TP20AU26.086
Summary statistics on average market size and its components are
presented in Table 3 below. Values for all 338 industry groups or
industries are provided in Table A in the Appendix. For both industry
groups and industries with employment based and receipt based size
standards, the average market size is sharply skewed to the right as
indicated by the mean average market size exceeding the median. This is
driven by a skew in national industry size and is somewhat mitigated by
the effect of the number of geographic markets which is negatively
correlated with national industry size. As the number of geographic
markets decreases, the national industry size increases and vice versa.
The net import adjustment plays only a small role in industry groups or
industries with receipt based size standards, but more strongly
influences those with employment based size standards.
BILLING CODE 8026-09-P
[[Page 54142]]
[GRAPHIC] [TIFF OMITTED] TP20AU26.087
BILLING CODE 8026-09-C
For 307 out of 338 industry groups or industries, the standard data
sources and methodology can be used for all inputs, while the remaining
31 require
[[Page 54143]]
at least one deviation due to a variety of reasons, including,
nonstandard data sources, government competition, mobile workplaces, or
an asset based size standard. Any deviations will be noted as they
become relevant. After the calculation of average market size has been
explained in detail, the formula for calculating size standards from
the measure will be explained.
SBA believes a geographic component is appropriate to add to the
calculation of size standards because it is relative in determining
whether a firm is dominant in its field of operation. For example,
Software Publishers (NAICS 5132) compete in a national market with
major brands such as Microsoft or Adobe and thus have the highest size
standard, while Florists (NAICS 4593) compete in small local markets
and as such have a much lower size standard. Average market size is
chosen as the single most appropriate measure for determining small
business size standards because SBA can then compare a firm's size to
its industry group or industry's average market size to get the firm's
approximate market share. Using average market size thus serves as the
best approximation of the market average, capturing a wide array of
competing firms in a given domain. Higher market shares are indicative
of firms which are potentially dominant in their field.\42\
Distinguishing which firms possess greater market shares helps parcel
out small and nondominant firms by comparison. Because industry groups
and industries range widely in their characteristics, two firms of
equal size may be classified differently if they are in different
industries. For example, the scale required for a firm to dominate in
Child Care Services (NAICS 6244) is significantly less than Colleges,
Universities and Professional Schools (NAICS 6113), and average market
size reflects this difference with the former having an average market
size of $27 million while the latter has an average market size of
$17.6 billion.
---------------------------------------------------------------------------
\42\ In their 2023 Horizontal Merger Guidelines, the Federal
Trade Commission and Department of Justice, Antitrust Division look
for changes in the Herfindahl-Hirschman Index, which is the square
of all competing firm's market shares, when determining if potential
firms are allowed to merge.
---------------------------------------------------------------------------
6.1 National Industry Size
To calculate national industry size for most industry groups or
industries requires data from two sources, both produced by the Census
Bureau: SUSB to incorporate the contributions of businesses with
employees and NES to incorporate the contributions of businesses
without employees. Because of how geographic markets are calculated
below, only the contributions of firms in the contiguous United States
are included. Despite their exclusion to the calculations, the proposed
size standards will still be applicable to firms in Alaska and Hawaii,
as well as U.S. territories not covered by the data sources used.
For industry groups or industries with receipts based size
standards, national industry size can be straightforwardly calculated
as the sum of receipts for an industry in both SUSB and NES as follows:
\43\
---------------------------------------------------------------------------
\43\ For industry groups or industries with receipts based size
standards, the national industry size is also adjusted for the
average level of inflation and productivity growth between primary
data collection in March of 2022 and the present based on the method
described in the section ``Adjustment to Receipts Based Size
Standards for Productivity Growth and Inflation''. This adjustment
raises all receipts based values in the reported data sources by
22.1%.
[GRAPHIC] [TIFF OMITTED] TP20AU26.088
However, for those with an employment-based size standard there is
a challenge in combining the two sources since the owners of non-
employer firms are contributing the market despite not being employees,
though the intensity of that contribution is generally low. The SBA
considered treating each nonemployer business as equivalent to an
employee but rejected this because it would place too much emphasis on
nonemployers' contribution. Of the 29.8 million nonemployer firms in
the 2022 NES, 11.3 million (37.9 percent) took in less than $10,000 in
revenue, while the average revenue to employee in 2022 SUSB was
$374,583. As such the importance of nonemployers in an industry group
or industry should be lower than that of an employee. To adjust for
this disparity, each industry group or industry gives different weights
to account for the importance of nonemployers based on a comparison of
the revenue generated per employee and per nonemployer as follows:
[GRAPHIC] [TIFF OMITTED] TP20AU26.089
Nonemployer receipts per firm vary between 1.2 percent and 83.6
percent of receipts per employee with an average value of 26.5 percent.
While the individual contributions of nonemployer firms are low, their
combined contributions can be significant and so the SBA choose to
include them. Industry groups such as Taxi and Limousine Service (NAICS
4853) and Fishing (NAICS 1141) see more than half of all receipts
generated by nonemployers. With this adjustment factor defined the
national market size can then be calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP20AU26.090
Not only is [rho]i used to adjust the national industry size for
industry groups and industries with employment based size standards, it
is also used to adjust employee numbers at the county level for
calculating the geographic market definition below.
The method described above is applicable for 312 out of 338
industry groups and industries, but the remaining 26 require datasets
beyond SUSB and NES. Out of those, 19 are due to the industry groups or
industries
[[Page 54144]]
being excluded from those datasets, and as such, an alternative source
is needed. These are:
Farms (17 industry groups and industries in NAICS
subsectors 111 and 112)--Statistics on farm employment is collected by
the National Agricultural Statistics Service in the Census of
Agriculture. This data source contains employment information on 6 out
of the 17 industry groups with the remaining 11 industry groups or
industries are combined with one or more others.\44\ The employment of
the two is separated by using the ratio of aquaculture revenue to total
revenue in the combined reporting.
---------------------------------------------------------------------------
\44\ The industry groups which are combined are: (1) Food Crops
Grown Under Cover (NAICS 11141) and Nursery and Floriculture
Production (NAICS 11142), (2) Chicken Egg Production (NAICS 11231),
Broilers and Other Meat Type Chicken Production (NAICS 11232),
Turkey Production (NAICS 11233), Poultry Hatcheries (NAICS 11234),
and Other Poultry Production (NAICS 11239), (3) Sheep Farming (NAICS
11241) and Goat Farming (NAICS 11242), and (4) Aquaculture (NAICS
1125) and Other Animal Production (NAICS 1129).
---------------------------------------------------------------------------
Rail Transportation (NAICS 4821)--Statistics on employment
in the railroads and related industries is reported by the Railroad
Retirement Board in their Employment and Compensation Statistical
Tables. To calculate only the railroad industry group's employment, the
employment of Class I line-haul railroads, non-Class I line-haul
railroads, and the National Railroad Passenger Corporation (Amtrak) are
combined.
Insurance and Employee Benefit Plans (NAICS 5251)--the SBA
is unaware of any data on employment or receipts in this industry
group. Instead, expenses for private pension plans and group health
plans from the Employee Benefits Security Administration are used
instead of receipts in calculating size standards.
The remaining 7 industry groups do have data reported in SUSB and
NES. However, these sources lack information on government owned
entities which also compete on a regular basis in the industry
groups.\45\ These are:
---------------------------------------------------------------------------
\45\ Not all government owned entities are excluded from SUSB.
Government owned entities in the following NAICS Codes are included:
Beer, Wine, and Distilled Alcoholic Beverage Merchant Wholesalers
(NAICS 4248), Beer, Wine, and Liquor Stores (NAICS 44532), Tobacco
Stores (NAICS 459991), Book Publishers (513130), Monetary
Authorities--Central Bank (NAICS 5211), Savings Institutions (NAICS
522180), Credit Unions (NAICS 522130), Hospitals (NAICS 622),
Gambling Industries (NAICS 7132), and Casino Hotels (NAICS 721120).
Statistics of U.S. Businesses Methodology--Census Bureau.
---------------------------------------------------------------------------
Electric Power Generation, Transmission and Distribution
(NAICS 2211)--Government owned entities participate in the electricity
market both in generating and distributing electricity.\46\ To capture
this production the employment reported in SUSB is adjusted upward to
account for the fact that approximately 8.0% of electricity is
generated by public sources and 12.1% is distributed by public sources
as reported by the Energy Information Agency.
---------------------------------------------------------------------------
\46\ See for example US Department of Energy, ``Power Market
Administrations,'' n.d. https://www.energy.gov/ea/power-marketing-administrations.
---------------------------------------------------------------------------
Natural Gas Distribution (NAICS 2212)--Like electricity,
government owned entities participate in the distribution of natural
gas to end users. To capture this production the employment reported in
SUSB is adjusted upward using data from the Energy Information Agency.
Water, Sewage and Other Systems (NAICS 2213)--90% of all
water systems in the United States are operated by local
governments.\47\ To capture this production the employment reported in
SUSB is adjusted upward using data from the Environmental Protection
Agency, and the U.S. Geological Survey.
---------------------------------------------------------------------------
\47\ Environmental Protection Agency, ``Information about Public
Water Systems,'' last updated on March 16, 2026, https://www.epa.gov/dwreginfo/information-about-public-water-systems.
---------------------------------------------------------------------------
Urban Transit Systems (NAICS 4851)--2,174 out of 2,922
urban transport systems in the United States are operated by
governments, with virtually all operating funds being provided by state
and local governments.\48\ To capture this production, the employment
reported in SUSB is adjusted upward using data from the Federal
Transportation Administration.
---------------------------------------------------------------------------
\48\ 2022 Single Summary of Transit--Department of
Transportation.
---------------------------------------------------------------------------
Elementary and Secondary Schools (NAICS 6111)--About 91%
primary and secondary schools in the United States are operated by
local governments.\49\ To capture this production the employment
reported in SUSB is adjusted upward using data from the National Center
for Education Statistics.
---------------------------------------------------------------------------
\49\ See National Center for Education Statistics, ``Table 3.
Number of operating public elementary and secondary schools, by
school type, charter, and state or jurisdiction: School year 2023-
24,'' Common Core of Data: America's Public Schools, n.d., https://nces.ed.gov/ccd/tables/202324_summary_3.asp. This figure is derived
by taking the percentage of regular schools from the number of
operating schools. All regular schools are operated by local school
districts.
---------------------------------------------------------------------------
Junior Colleges (NAICS 6112) and Colleges, Universities
and Professional Schools (NAICS 6113)--Around 54% of both junior
colleges and 4-year universities are operated by state governments.\50\
To capture this production the employment reported in SUSB is adjusted
upward using data from the National Center for Education Statistics.
Junior Colleges are identified as those specializing in degrees with an
expected completion time of 2-years or less.
---------------------------------------------------------------------------
\50\ According to current education statistics as of June 2026,
there are 2,177 public universities out of 4,000 universities in the
U.S.
---------------------------------------------------------------------------
6.2 Number of Geographic Markets
Calculating the number of geographic markets for a particular
industry or industry group is distinct from calculating the national
industry size. For purposes of SBA's proposed methodology, the SBA
believes that the best reading of the Small Business Act's definition
of a small business concern would be to read ``field of operation'' as
equivalent to how the Federal Trade Commission and Department of
Justice recently read ``any line of commerce in any section of the
country'' from the Clayton Antitrust Act \51\ in their horizontal
merger guidelines.\52\ Their definition has two key components: a
product component, which the national industry size incorporates, and a
geographic component which will vary in scope for different products.
On an intuitive level, geographic market should capture the distance
over which customers travel to buy the goods or services of an industry
group or industry, or the distance those goods or services travel to
reach customers. For example, customers are likely to only travel short
distances to get their haircut, go to the grocery store, or get their
car repaired. However, at the same time customers are likely to
purchase food grown in California's central valley, fill their gas tank
with gasoline refined on the Gulf Coast, and purchase a new car
manufactured in Michigan even when they live nowhere near those places.
To approximate the behavior of customers in various industries, SBA
uses a modification of methodology the U.S. Department of Agriculture,
Economic Research Service (USDA) uses to create commuting zones which
cover the entire country.\53\ Commuting zones have been widely used in
the economic literature because of their complete coverage of the
United States, unlike other local area market
[[Page 54145]]
definitions such as metropolitan statistical areas.\54\
---------------------------------------------------------------------------
\51\ 15 U.S. Code 18.
\52\ 2023 Horizontal Merger Guideline--Department of Justice.
\53\ Commuting Zones and Labor Market Areas--USDA, Economic
Research Service The full methodology for calculating 2020 commuting
zones is specified in Fowler (2024), prior 2010 commuting zones in
Fowler et. al (2016), and 1990 commuting zones in Tolbert and Sizer
(1996).
\54\ Examples include Autor and Dorn (2013), Autor et. al
(2013), Acemoglu and Restrepo (2020), and Jha et. al (2024).
---------------------------------------------------------------------------
The algorithm the USDA uses to derive commuting zones works by
finding the two counties with the strongest connection between them in
terms of the number of workers who live in one of the counties but work
in the other relative to the counties' number of workers, which is
referred to as a proportional flow.\55\ The data on commuting patterns
comes from the American Community Survey Commuting Flows data produced
by the Census Bureau. Once the two counties with the highest
proportional flow have been identified they are combined into one
commuting zone and the process repeats until the commuting connections
between all current commuting zones falls below a predefined level of
0.023. Formally the proportional flow of commuters between commuting
zone i and j is defined as follows:
---------------------------------------------------------------------------
\55\ The commuting zones algorithm also includes a check for if
two counties are adjacent to one another. For purposes of the size
standards methodology this check is of minimal importance as data
from Alaska and Hawaii excluded due to the generally weak commuting
patterns between these areas and the contiguous United States.
[GRAPHIC] [TIFF OMITTED] TP20AU26.091
The modified version of the algorithm SBA uses is the same except
that instead of stopping once a predefined level has been reached, each
industry group or industry has the potential to stop at a different
level, using a stopping rule based on its geographic disparity of
employment. Disparity in employment is used for all industry groups and
industries, regardless of what size standard measure is ultimately
used. The SBA considered using the disparity in receipts for those
industry groups and industries with a receipts based size standard, but
concluded this would be inappropriate for two reasons. First, while
data on receipts at the county level is available in SUSB, it is only
available at the 3-digit subsector level. Second, receipts disparity
would encounter problems related to differences in costs of living
between different areas of the country, because it would make it look
like less activity was taking place in low cost of living areas. Like
commuting zones, this concept has also been used in the economics
literature.\56\ This measure works by comparing the fraction of all
industry group or industry employees and fraction of total population
in an area. If the sum of all discrepancies between the two values is
below a predefined level of 0.15, the agglomeration of counties for the
industry is stopped.\57\
---------------------------------------------------------------------------
\56\ Examples included Ellison and Glaeser (1997), Desmet and
Fafchamps (2006), Gervais and Jensen (2019) and Mayo et al. (2025).
\57\ The geographic dispersion ranges from zero to one, with
zero representing a perfect match between employment and population,
and one representing a complete separation of employment and
population. The chosen stopping rule value of 0.15 thus represents a
roughly equal distribution of employment and population across the
country.
---------------------------------------------------------------------------
The SBA considered choosing a lower stopping value of 0.12 but
rejected it as it suggested too few industry groups or industries for
county level markets, excluding the likes of Offices of Dentists (NAICS
6212) and Child Care Services (NAICS 6244). The SBA also considered
choosing a higher stopping value of 0.18 but rejected it as it
suggested to few industry groups or industries for national level
markets, excluding the likes of Aerospace Product and Parts
Manufacturing (NAICS 3364) and Software Publishing (NAICS 5132).
Formally, an industry group or industry's geographic disparity of
employment is defined as:
[GRAPHIC] [TIFF OMITTED] TP20AU26.092
Data on employment and number of nonemployer firms at the county
level is gathered from the CBP and NES, respectively, both of which are
produced by the Census Bureau. For 11 industry groups, the geographic
disparity is below the stopping value at the first check and thus have
3,109 geographic markets, one for each county in the contiguous United
States. This group includes industries such as Offices of Dentists
(NAICS 6212), Child Care Services (NAICS 6244), and Restaurants and
Other Eating Places (NAICS 7225). On the other side, 46 industry groups
and industries only have their geographic disparity fall below the
stopping value when all counties have been combined together, and thus,
these have just a single geographic market. This group includes
industry groups such as Metal Ore Mining (NAICS 2122), Aerospace
Product and Parts Manufacturing (NAICS 3364), and Software Publishing
(NAICS 5132).
---------------------------------------------------------------------------
\58\ To reiterate, the USDA's commuting zones have been widely
relied upon in the academic literature, specifically across labor
economic studies.
\59\ GDP by State--Bureau of Economic Analysis.
---------------------------------------------------------------------------
The above method is effective for calculating the size of
geographic markets for most industry groups and industries, given it
builds on USDA's peer-reviewed algorithm.\58\ However, there are some
general challenges that must be overcome. First are the detached states
of Alaska and Hawaii. The USDA's algorithm includes a check to see if
two counties border one another before they can be combined. This check
precludes any industry group or industries from having just a single
national market. This is unlikely for products that are shipped over
great distances or services that can be provided remotely. Cargo can be
shipped on ocean vessels, and services can be done over the phone or
the internet for which a land boarder is not relevant. The SBA
considered excluding the bordering check, which would allow for a
national market size, but chose to reject one because Alaska and Hawaii
were the last areas to be adjoined due to their remote locations. With
just 0.7 percent of U.S. Gross Domestic Product produced by these two
states, this still led to relatively few industry groups or industries
with national markets.\59\ As such, SBA has chosen to exclude data
[[Page 54146]]
on firms from Alaska and Hawaii when calculating all numbers related to
size standards.
The second general challenge is that the Census Bureau suppresses
data when it might reveal confidential business information. Whenever
an observation in the CBP or NES would have fewer than three
establishments, the data is suppressed, and no observation is
reported.\60\ This is a minor problem for industry groups such as
Restaurants and other Eating Places (NAICS 7225) with many
establishments spread throughout the country. A few counties with
employment in the industry go unreported; but the error is minor.
However, the problem is much greater for industry groups with very few
establishments such as Forest Nurseries and Gathering of Forest
Products (NAICS 1132), which possesses just 160 establishments in the
entire country. For this industry, only three establishments are
reported in the county data.
---------------------------------------------------------------------------
\60\ County Business Patterns Methodology--Census Bureau,
Nonemployer Statistics Methodology--Census Bureau.
---------------------------------------------------------------------------
To address this issue, the suppressed data are placed into counties
without data using a two-step Heckman process \61\ for employees and a
probit regression for the nonemployer firms. In the first step, the
counties with the highest probability of containing an establishment
but do not are found using probit regression. This is done with the
following regression:
---------------------------------------------------------------------------
\61\ Heckman (1974).
[GRAPHIC] [TIFF OMITTED] TP20AU26.093
where popj is the populations, latj is the latitude, and lonj is the
longitude of county j. The inclusion of latitude, longitude, their
squares, and their interaction is included so that geographic
concentration of an industry can be included.\62\ Note that each
coefficient is industry group or industry specific so each industry can
have a different geographic concentration profile. For nonemployer
firms the process stops here and the most likely counties are given 1.5
nonemployer firms each till all missing firms have been accounted for.
For the employer firms, the second step then estimates the natural
logarithm of employment in each county using ordinary least squares
with the only independent variables being the population, an industry
(or industry group) fixed effect and the inverse mills ratio ([lgr]i,j)
from equation 7 to predict employment in the most likely counties to be
included:
---------------------------------------------------------------------------
\62\ For ten industry groups or industries a modified version of
equation 7 is used that includes only population and the industry
fixed effect. This is due to these having very limited employment
and establishment data at the county level (less than 10 counties in
the continental U.S.). The 10 are Forest Nurseries and Gathering of
Forest Products (NAICS 1132), Sugar Manufacturing (NAICS 31131),
Tobacco Manufacturing (NAICS 3122), Narrow Fabric Mills and Schiffli
Machine Embroidery (NAICS 31322), Knit Fabric Mills (NAICS 31324),
Leather and Hide Tanning and Finishing (NAICS 3161), Artificial and
Synthetic Fibers and Filaments Manufacturing (NAICS 32522), Cement
Manufacturing (NAICS 32731), Lime Manufacturing (NAICS 32741), and
Securities and Commodity Exchanges (NAICS 5232).
[GRAPHIC] [TIFF OMITTED] TP20AU26.094
While the above method can be used to find the number of geographic
markets for most industries, 29 have issues which must be addressed.
Twenty-five of these arise due to the need to bring in industry
specific data which does not have county level granularity. For these
an approximate geographic scope is chosen based on known industry group
or industry characteristics. These are:
Farms (NAICS 111 & 112)--the 17 farming industry groups
and industries do not have useful geographic data on employment in the
Census of Agriculture for this purpose. For these a single geographic
market is assumed, since farming requires a lot of land and therefore
tends to be located far from major population centers. SBA replaced
employment with the acreage of six crops (wheat, corn, hay, soybeans,
vegetables, and fruit orchards), and the number of three types of
livestock (cattle, hogs, and broiler chickens) in the clustering
algorithm and found that each suggested a single geographic market.
Natural Gas Distribution (NAICS 2212)--using the CBP which
only counts the private sector firms, this industry group has 12
geographic markets, which seems low given that the local nature of this
industry group. Instead, the number of geographic markets is adjusted
upwards to 554 to match the number of commuting zones, since most
natural gas is distributed over relatively short distances.
Water, Sewage and Other Systems(NAICS 2213)--using the CBP
which only counts the private sector firms, this industry group has 21
geographic markets, which is rather low given the localized nature of
this industry group. Instead, the number of geographic markets is
adjusted upwards to 554 to match the number of commuting zones, since
water systems are generally run by local governments.
Railroad Transportation (NAICS 4821)--the railroad
industry does not have useful geographic data from the Railroad
Retirement Board. Much of the railroad industry group is scattered
throughout the continental United States given the nature of long-
distance transport. For this industry group, a single geographic market
is assumed, since railroads transport goods and people over long
distances. Similar industry groups Deep Sea, Coastal, and Great Lakes
Water Transportation (NAICS 4831) and Inland Water Transportation
(NAICS 4832) have a single geographic market, while Nonscheduled Air
Transportation (NAICS 4812) has three.
Urban Transit Systems (NAICS 4851)--the urban
transportation industry group does not have useful geographic data from
the Federal Transit Administration. For this industry group, the number
of geographic markets is set at 554 which matches the number of
commuting zones in the continental United States, since that level of
aggregation is similar in size to the metropolitan area that many firms
service.
Insurance and Employee Benefit Funds (NAICS 5251)--this
industry group does not have useful geographic data from the Employee
Benefits
[[Page 54147]]
Security Administration. For this industry group, the number of
geographic markets is set at 554 which matches the number of commuting
zones in the continental United States. This level of aggregation was
chosen because competition in this industry group is based around the
employment decisions of workers which will mirror their commuting
decisions.
Elementary and Secondary Schools (NAICS 6111)--this
industry group does not have useful geographic data from the National
Center of Education Statistics. For it the number of geographic markets
is set at 3,109 which matches the number of counties in the continental
United States.\63\ This level of aggregation was chosen because public
primary and secondary schools tend to be funded with local taxes.
---------------------------------------------------------------------------
\63\ The contiguous United States covers 48 states and the
District of Columbia. It excludes disconnected states like Hawaii
and Alaska. It also does not include US territories like Guam and
Puerto Rico.
---------------------------------------------------------------------------
Junior Colleges (NAICS 6112) and Colleges, Universities,
and Professional Schools (NAICS 6113)--these industry groups do not
have useful geographic data from the National Center of Education
Statistics. For them, the number of geographic markets is set at 49
which matches the number of states in the contiguous United States,
including the District of Columbia. This level of aggregation was
chosen because public postsecondary education is partially funded
through the states.
For the remaining four industry groups which use the standard data
sources, the geographic market algorithm produces implausible narrow
geographic scopes. SBA recognizes the flaw in the methodology as to
these four industry groups and proposes an approach to those outlined
below. Although SBA cannot determine the exact cause for these
outliers, it notes that all four share a common feature of having a
mobile workforce, which could be partially at issue.\64\
---------------------------------------------------------------------------
\64\ The Census Bureau acknowledges this problem in the SUSB
methodology for Employment Services (NAICS 5913), and thus, reports
a significant proportion of the industry employment only as
``statewide'' rather than specifying a county.
---------------------------------------------------------------------------
Taxi and Limousine Service (NAICS 4853)--using the
standard methodology for finding the number of geographic markets
produces an implausibly small number for this industry group-ten--given
that taxis and limousines are prevalent throughout most major cities in
the United States. To address this potential flaw, this figure is
replaced with 554, which matches the number of commuting zones in the
contiguous United States. This number is chosen due to the mobile
nature of this industry group.
School and Employee Bus Transportation (NAICS 4854)--using
the standard methodology for finding the number of geographic markets
for this industry group produces an implausibly small one. Instead,
this is replaced with 554 which matches the number of commuting zones
in the continental United States. This number is chosen due to the
mobile nature of this industry group.
Employment Services (NAICS 5613)--using the standard
methodology for finding the number of geographic markets for this
industry group produces an implausibly small four. Instead, this is
replaced with 554 which matches the number of commuting zones in the
continental United States. This number is chosen due to the mobile
nature of this industry group.
Home Healthcare Services (NAICS 6216)--using the standard
methodology for finding the number of geographic markets for this
industry group produces an implausibly small four. Instead, this is
replaced with 554 which matches the number of commuting zones in the
continental United States. This number is chosen due to the mobile
nature of this industry group.
6.3 Net Import Adjustment
The last required piece for calculating an industry group or
industry's average market size is to adjust the imports and exports of
the goods and services produced by it. Without this adjustment, some
industry groups or industries with heavy import competition will appear
too small, while others with dominant American exporters will appear
too large. To do this data from the Bureau of Economic Analysis's (BEA)
Use of Commodities by Industry Table is used.\65\ The net imports
adjustment is calculated as follows:
---------------------------------------------------------------------------
\65\ The industry detail that the BEA uses is not the same as
NAICS 4-digit industry. Some industries are combined in the BEA data
while others are broken down further. For combined industries all
are assumed to have the same net import adjustment. For those with a
more detailed breakdown, the lower levels of industry details are
first summed before the Net Import Adjustment is calculated.
Additionally, the BEA reports construction by type of structure
rather than type of firm. As such given the inability to transport
construction output, all industries in the construction sector are
given a net import adjustment of one.
[GRAPHIC] [TIFF OMITTED] TP20AU26.095
An example of an industry group that is larger than the sum of U.S.
employment or receipts would suggest is Audio and Video Equipment
Manufacturing (NAICS 3343). According to the BEA, the U.S. imported 8.7
times more in this industry group than it produced domestically. Given
the strong foreign competition in this market, a domestic television
manufacturer should be considered small at a higher level than a firm
in another industry group or industry with a similar number of
employees but no imports, because 90 percent of competition by revenue
is located outside the United States. Other examples include: Footwear
Manufacturing (NAICS 3162), Computer and Peripheral Equipment
Manufacturing (NAICS 3341), and Household Appliance Manufacturing
(NAICS 3352). On the other hand, an industry group such as
Semiconductor Machinery Manufacturing (NAICS 3332) sees 51.5 percent of
domestic output sent abroad as exports. Other examples include: Oilseed
and Grain Farming (NAICS 1111), Aerospace Product and Parts
Manufacturing (NAICS 3364), and Software Publishing (NAICS 5132). Given
the implications of high exports for the size of the domestic market, a
domestic semiconductor machinery manufacturer should be considered
large at a lower level than another industry group or industry with a
similar number of employees but no exports. The overall impact of the
net import adjustment raises average market sizes more than it lowers
them.
6.4 SBA Size Standards
With the average market size for an industry group or industry
calculated, the size standard can now be calculated. Due to the broad
range in average market sizes, SBA has not proposed a single fraction
of average market size to
[[Page 54148]]
be used for all size standards. Instead, the fraction slowly decreases
as the average market size increases. As the average market sizes for a
particular industry group or industry become larger, it increases the
likelihood that niches exist within that act almost as their own
markets. And a firm may be able to dominate one of those niches without
operating in the others. For example, while Doctor's Offices are a
single industry group (NAICS 6211 Offices of Physicians), there are
multiple specialties acting as separate markets within this industry.
Cardiologists compete with other Cardiologists, while Obstetricians
compete with other Obstetricians, but there is no competition between
the two specialties. Additionally, SBA has proposed to establish a
minimum small business size which is used even when the average market
size would suggest a smaller size standard would be justified. This is
done so that all businesses below an absolute size level can still have
access to SBA services. For employment based size standards, the
minimum size standard is 500 employees, which has long been considered
the anchor size standard by SBA. Outside of the Wholesale Sector (NAICS
42), which has its own special size range, only one industry Geothermal
Electric Power Generation (NAICS 221116) has a size standard lower than
500 employees. Furthermore, for contracting purposes 500 employees is
used as the size standard for all Wholesale (NAICS 42) and Retail
(NAICS 44-45) sales. For receipt based size standards, the minimum size
standard is $30.6 million which is equivalent to the original receipts
based size standard of $1 million in 1954 after it has been adjusted
for both inflation and productivity growth.\66\
---------------------------------------------------------------------------
\66\ See the discussion in Section 7 for further details on this
calculation.
\67\ The exact equation of the exponent is as follows: ln (2,500
employees/500 employees) / ln (200,000 employees/500 employees) =
0.2686.
---------------------------------------------------------------------------
For employment based size standards the equation that defines the
relationship between average market size and small business size
standards is as follows:
[GRAPHIC] [TIFF OMITTED] TP20AU26.096
The exponent in equation 10 has been chosen such that the size
standard is defined by two anchor points. The low anchor point is the
minimum size standard of 500 employees at an average market size of 500
employees, and the high anchor point is a size standard of 2,500
employees when the average market size is 200,000 employees.\67\ SBA
choose this high anchor point because it believes that a firm with
2,500 employees would not be dominant in a market with 200,000
employees, since it would have a low market share of 1.25 percent. Due
to the formula for calculating size standards, there is no explicit
maximum size standard; rather, the calculated size standard grows more
slowly as the average market size gets bigger as seen below in Figure
1. When moving from an average market size of 500 to 1,000 employees
the size standard increases by 102 employees, whereas when the average
market size increases from 200,000 to 200,500 employees it increases by
just 2 employees.
[[Page 54149]]
Figure 4: Relationship Between Average Market Size and Employment Based
Size Standards
[GRAPHIC] [TIFF OMITTED] TP20AU26.097
For receipt based size standards the equation that defines the
relationship between average market size and small business size
standards is much the same, just with employment levels replaced with
receipts:
[GRAPHIC] [TIFF OMITTED] TP20AU26.098
The exponent in equation 11 has been 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.\68\ SBA choose
this high anchor point because it believes that a firm with $500
million in receipts would not be dominant in a market with $20 billion
in receipts, since it would have a low market share of 2.5 percent. Due
to the formula for calculating size standards there is no explicit
maximum size standard, rather the calculated size standard grows more
slowly as the average market size gets bigger as seen below in Figure
2. When moving from
[[Page 54150]]
an average market size of $30 million to $130 million the size standard
increases by $26.5 million, whereas when the average market size
increases from $20 billion to $20.1 billion it increases by just $1.3
million.
---------------------------------------------------------------------------
\68\ The exact equation of the exponent is as follows: ln ($500
million/$30.6 million) / ln ($20 billion/$30.6 million) = 0.4310.
---------------------------------------------------------------------------
Figure 5: Relationship Between Average Market Size and Receipts Based
Size Standards
[GRAPHIC] [TIFF OMITTED] TP20AU26.099
The final piece in calculating size standards is to round the
output so that they are more easily digestible to both small businesses
and those working to support them. For employment based size standards,
size standards are rounded to the nearest 50 employees. This is the
same degree of rounding that the 2024 methodology used for employment
based size standards outside of Wholesale Trade (NAICS Sector 42),
where size standards were rounded to the nearest 25 employees. For
receipts based size standards, size standards are rounded to the
nearest $1 million in receipts. This is not the same degree of rounding
that the 2024 methodology used for receipt based size standards which
instead rounded to the nearest $0.5 million for most industries and
$0.25 million for farming (NAICS 111 and NAICS 112). The proposed
change in rounding is because of the generally higher size standards
brought about by adjusting them for productivity which raises the
minimum size standard from $8 million to $31 million.
One final industry group remains which needs a size standard,
Depository Credit Institutions (NAICS 5221), which the SBA is proposing
to continue with an asset based size standard. Depository Institutions,
such as banks and credit unions, face additional fluctuations in their
receipts as compared with other industries because both their receipts
and expenses are tied closely to interest rates. For example, across
all federally insured depository institutions, receipts increased 19.8
percent between 2021 and 2022 while total assets remained flat and net
income fell 4.0 percent due to rising interest rates.\69\ As such the
SBA has proposed size standards for these firms in total assets since
1984 (49 FR 40399). Total assets is the preferred measure for size
standards for these firms because financial regulators also use it for
classifying firms by size. To calculate the asset based size standard,
the SBA first begins with receipts based size standard calculated for
the industry group, of $222 million. The asset based is then determined
by multiplying this by the ratio of total assets to total receipts in
2022 in the Federal Deposit Insurance Corporation's 2023 Quarterly
Banking Report and the National Credit Union Administration's Quarterly
Data
[[Page 54151]]
Summary Report, which was 22.66. This gives a size standard of $5,031
million when rounded to the nearest million dollars.
---------------------------------------------------------------------------
\69\ Quarterly Banking Report--Federal Deposit Insurance
Corporation and Quarterly Data Summary Report--National Credit Union
Administration.
---------------------------------------------------------------------------
SBA's objective in proposing this size standard methodology is to
ensure no dominant firms are misclassified as small businesses while
minimizing the number of non-dominant firms which are misclassified as
large businesses. Like the current size standards, however, a number of
firms that are dominant may inevitably be captured under a size
standard by virtue of setting size standards at any level higher than a
business-by-business level. For example, businesses such as a lone gas
station for one hundred miles on a rural highway can have a dominant
market position even with just a few employees because the market is
small. SBA requests comment on potential additional avenues to ensure
no dominant firms are captured.
The proposed methodology recommends increasing most size standards
though there are exceptions. Under the methodology, 114 thousand
businesses would be expected to be reclassified as small businesses due
to the proposed changes in methodology.\70\ The industry groups with
the most new small businesses would be expected to be Management of
Companies and Enterprises (NAICS 5511), Restaurants and Other Eating
Places (NAICS 7225), Other Miscellaneous Retailers (NAICS 4599), and
Building Equipment Contractors (NAICS 2382) each with more than 4,000
business that would be expected to reclassify. Amongst industry groups
with at least 1,000 current small businesses, the industries which
would see the largest percentage change in small businesses are
Colleges, Universities, and Professional Schools (NAICS 6113) with a
54% increase, General Medical and Surgical Hospitals (NAICS 6221) with
a 45% increase, and Management of Companies and Enterprises (NAICS
5511) with a 38% increase. Amongst industry groups which would lose
small business status, the two with the greatest number are Wired and
Wireless Telecommunications (except Satellite) (NAICS 5171) and Waste
Collection (NAICS 5621) which would be expected to see 41 and 33 new
large businesses respectively. All other industries would be expected
to see fewer than 20 new large businesses.\71\ In total 172 businesses
currently classified as small would be expected to lose that status.
---------------------------------------------------------------------------
\70\ This number excludes any increases in the number of small
businesses in the farming industries (NAICS 111 and 112), and
Insurance and Employee Benefit Funds (NAICS 5251), which are not
included in SUSB. There may be as many as 38 thousand farms that
could gain small business status though the Census of Agriculture
lacks detailed data on firm size by employment to make a confident
estimate.
\71\ The full list of industries with new large businesses is as
follows:
Electric Power Generation, Transmission and Distribution (NAICS
2211) 14 new large businesses.
Natural Gas Distribution (NAICS 2212) 17 new large businesses.
Sugar and Confectionery Products (NAICS 3113) Manufacturing 1
new large business.
Bakeries and Tortilla Manufacturing (NAICS 3118) 2 new large
businesses.
Other Food Manufacturing (NAICS 3119) 2 new large businesses.
Beverage Manufacturing (NAICS 3121) 3 new large businesses.
Tobacco Manufacturing (NAICS 3122) 4 new large businesses.
Other Textile Product Mills (NAICS 3149) 4 new large businesses.
Petroleum and Coal Products Manufacturing (NAICS 3241) 2 new
large businesses.
Pesticide, Fertilizer, and Other Agricultural Chemical
Manufacturing (NAICS 3253) 7 new large businesses.
Soap, Cleaning Compound, and Toilet Preparation Manufacturing
(NAICS 3256) 4 new large businesses.
Glass and Glass Product Manufacturing (NAICS 3272) 2 new large
businesses.
Cement and Concrete Product Manufacturing (NAICS 3273) 3 new
large business.
Industrial Machinery Manufacturing (NAICS 3332) 2 new large
businesses.
Commercial and Service Industry Machinery Manufacturing (NAICS
3333) 10 new large businesses.
Ventilation, Heating, Air-Conditioning, and Commercial
Refrigeration Equipment Manufacturing (NAICS 3334) 4 new large
businesses.
Engine, Turbine, and Power Transmission Equipment Manufacturing
(NAICS 3336) 1 new large business.
Nonscheduled Air Transportation (NAICS 4812) 2 new large
businesses.
Pipeline Transportation of Crude Oil (NAICS 4861) 3 new large
businesses.
Other Pipeline Transportation (NAICS 4869) 3 new large
businesses.
Wired and Wireless Telecommunications (except Satellite) (NAICS
5171) 41 new large businesses.
Insurance Carriers (NAICS 5241) 3 new large businesses.
Waste Collection (NAICS 5621) 33 new large businesses.
Drycleaning and Laundry Services (NAICS 8123) 5 new large
businesses.
---------------------------------------------------------------------------
7. Adjustment to Receipts Based Size Standards for Productivity Growth
and Inflation
SBA makes adjustments to its receipts based size standards when
necessary. Adjustments are proposed to be made for two factors the
general price increases of inflation and the improving productivity of
the U.S. Economy. Prior versions of SBA size standard methodology only
adjusted for inflation. Without considering productivity growth in its
size standards, SBA put small businesses in industries with a receipts
based size standard at a disadvantage to those in industries with an
employee based size standard, which have an implicit adjustment for
productivity built in. Productivity growth allows small businesses with
a given set of resources (time, capital, materials) to more efficiently
convert them into useable goods and services. Productivity growth leads
to greater output that is not captured by inflation. Without accounting
for productivity, the size standards are left with an incomplete
assessment of small business size. Over the 72 years since SBA adopted
its first receipts based size standard of $1 million, the change in
productivity has been substantial. As seen in 6, when only adjusting
receipt based size standards for inflation as measured by the Gross
Domestic Product (GDP) implicit price deflator the original $1 million
size standard is the equivalent to $9.7 million in the first quarter of
2026. However, when using both inflation and productivity the
equivalent size standard in 2026 is $30.6 million. Without adjusting
for productivity, the SBA has presumed that businesses with receipts
based size standards are operating in a similar way to their
counterparts 72 years ago. The SBA has repeatedly received petitions to
raise size standards or use employee-based standards so that small
firms can continue to stay relevant in their industry and withstand
rapid, ever-changing economic realities, additional requirements in
contracts expanding what the government is procuring, changing costs of
doing business, shrinking margins, and various other shifts that the
prior SBA size standards were unable to swiftly react to.
[[Page 54152]]
Figure 6: Adjusting the Original Receipts Based Size Standard for
Productivity Growth and Inflation
[GRAPHIC] [TIFF OMITTED] TP20AU26.100
To adjust receipt values for both inflation and productivity
changes, SBA creates an index of the GDP per employee in the U.S.
economy. Data on GDP comes from the BEA, while data on total employment
comes from the Bureau of Labor Statistics. Both are accessed through
the Federal Reserve Bank of St. Louis for convenience.\72\ The
cumulative inflation and productivity growth between any two periods is
then calculated as follows:
---------------------------------------------------------------------------
\72\ Federal Reserve Economic Data--Federal Reserve Bank of St.
Louis.
[GRAPHIC] [TIFF OMITTED] TP20AU26.101
where the End Period is the period that data was collected or the most
recent period for which GDP per employee can be calculated when
adjusting monetary size standards, and the base period is the last
period for which size standards
[[Page 54153]]
have been adjusted for inflation and productivity. Since receipt based
size standards have never been adjusted for both inflation and
productivity, the base period for adjusting size standards in this
document is the first quarter of 1954. This puts the minimum size
standard in the first quarter of 2026 at $30.6 million, while for the
first quarter of 2022 when the vast majority of the data used to
calculate size standards was collected the minimum size standard would
be $25.1 million. These numbers are reflected in the above section on
calculating size standards.
When SBA revises size standards in accordance with its regular
review of all size standards are required under the Jobs Act (Pub. L.
111-240, 124 Stat. 2504; September 27, 2010), it will also adjust all
receipt based size standards for inflation and productivity growth.
Given the long gaps between the regular reviews, SBA may also adjust
monetary size standards more frequently for inflation and productivity
growth as it deems necessary.
8. Discussion on the Changes in Methodology
The proposed size standard methodology represents a
significant departure from the previous version published in 2024.\73\
As such a detailed discussion of the changes in methodology is
warranted to inform the public on why these changes were proposed. The
five most significant changes are:
---------------------------------------------------------------------------
\73\ SBA'S Size Standards Methodology.
---------------------------------------------------------------------------
Changing the NAICS level at which size standards are
calculated from the 6-digit NAICS code to a mix of 4- and 5-digit NAICS
codes--In the current version of SBA size standards, there are nearly
1,000 unique size standards, with numerous exceptions for federal
contracting purposes. For example, there is currently a different size
standard for Ship Building (1,300 employees) than there is for Boat
Building (1,000 employees). While Ships are larger than boats and are
more likely to be used for commercial purposes, there is gray area
where a firm could be uncertain which standard applied to them. This
uncertainty can be resolved as both NAICS 6-digit industries are
combined into a single 4-digit industry group. Along with change in
aggregation, SBA has also chosen to remove all size standard
exceptions.
Converting numerous industry groups and industries from
receipt based size standards to an employment based one--In the current
version of SBA size standards, it is the default to assume that outside
of manufacturing and services where Congress specified the measure for
size standards, an industry should have a receipts-based size standard
unless certain conditions are met including highly capital intensive
industries and low operational costs. This method had 51.6% of size
standard be receipts based and 88.8% of all employer firms being in
those industries. The proposed methodology takes the opposite approach
and defaults to an employment based size standard for all industry
groups and industries except service based ones where Congress
specified that a receipts based size standard must be used.\74\ As
discussed above, this new method is intended to decrease the
fluctuations of firms between small and large business status,
especially for Federal contractors. The proposed change also would
lower the percentage of size standards with a receipts based size
standard to 37.9%, and the number of firms with one to 58.2%.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 632(a)(2)(C)(ii)(II).
---------------------------------------------------------------------------
Updated factors determining small business size
standards--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. These
factors, while often associated with a firm's dominance in its field of
operation, did not directly relate and in some cases led size standards
astray. For example, the small size of farms led SBA to giving them
size standards far below firms in other sectors of the economy despite
the fact that the markets they competed in are national in scope. 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. The change in factors
is intended to more closely align the size standards methodology with
the statutory language of the Small Business Act that a small business
is one which is ``not dominant in its field of operation.'' A field of
operations should include both the goods or services and business
provides but also the geographic area in which they compete, similar to
the way the Federal Trade Commission (FTC) and Antitrust Division of
the Department of Justice (DOJ) define a market in their Horizontal
Merger Guidelines.\75\ A firm may be relatively small nationally but be
dominant in a small market as is the case with hospitals which are
among the most challenged industry group by the FTC and DOJ despite a
very low national concentration.\76\ On the other hand, a firm could be
much larger nationally but not be dominant because it competes in a
national or even international market. Such is the case with Oil and
Gas extraction where the FTC has implemented regulations to exempt
acquisitions of mineral rights from the ordinary requirements of
premerger notification (16 CFR 802.3 last amended 70 FR 4994, January
31, 2005).
---------------------------------------------------------------------------
\75\ 2023 Merger Guidelines--Antitrust Division, Department of
Justice.
\76\ Annual Competition Reports--Federal Trade Commission.
---------------------------------------------------------------------------
Updated the formula for how factors translate to size
standards--The current size standard methodology creates a size
standard for each of the seven factors discussed above and then
averages those together. In selecting size standards, SBA compares an
industry's factor to its relative position among a comparison group of
industries. This can lead to unintended consequences if an industry's
factor suggests in the absolute case that a size standard should be
raised, but the comparison group's factors rose faster leading instead
to a recommendation that size standards be lowered. Many of the factors
also have a significant skew which led to very high recommended size
standards, or, in the case of Gini coefficient size standards less than
zero which required the imposition of minimums and maximums to be
imposed at early stages in the size standard setting process. The
proposed methodology instead uses a different approach of combining its
three factors into a single measure, average market size, from which
size standards are calculated. Like the factors of the current
methodology this measure is skewed but that skew is addressed
differently. As average market size grows larger so to do size
standards, but at a decreasing rate. This means that there is no
maximum size standard. A minimum size standard is kept to ensure that
all businesses that are small in absolute size can still access SBA
programs.
Added in a productivity growth adjustment for monetary
based size standards--SBA has since 1975 (40 FR 32824; August 5, 1975)
periodically adjusted receipt based size standards upwards to account
for inflation; however, it has to date never adjusted size standards
for productivity growth. Without a productivity growth
[[Page 54154]]
adjustment, receipt based size standards have fallen out of step with
employment based ones which have a natural productivity adjustment
built in since a business is free to invest in productivity enhancing
technology or training without risk of losing its small business
status. By adopting this change small businesses will not lose their
small business status due to the general productivity growth of the
entire U.S. economy.
9. Public Comments
Public comments on proposed size standard rules provide additional
important information. These comments can supplement SBA's analysis of
industry structure or the data it used, thereby enabling it to consider
other relevant information, where appropriate, in the final decision on
a size standard. SBA welcomes and thoroughly reviews all public
comments before making final decisions on proposed changes to size
standards methodology. While SBA welcomes comments on any aspect of its
proposed methodology, including reliance interests implicated by using
such methodology to update size standards, in particular SBA is
interested in the following questions:
Has SBA chosen the appropriate level of aggregation? Are
there markets where the 4-digit NAICS code is too general and a more
granular 5-digit NAICS code would be more appropriate? Conversely are
some of the industries for which the SBA is proposing a size standard
at the 5-digit level too narrow and should be aggregated to the 4-digit
level?
Has SBA chosen the appropriate size measure for all
industry groups and industries? Should some with employment based size
standards have a receipt based one or vis versa? Should some have their
size standard defined in terms of some other measure besides employment
or receipts?
Has SBA used the most appropriate data sources for
incorporating industry groups and industries not included in SUSB, NES,
and CBP? Are there more industry groups and industries which have a
significant presence of government owned entities which should be
incorporated? If so, what publicly accessible data sources produced by
Federal agencies are most appropriate to use?
Does the algorithm for calculating the number of
geographic markets produce reasonably sized markets for industry groups
and industries in general? If not are the geographic markets
systematically too large or too small? Are the deviations SBA proposes
appropriate? Are there more industry groups or industries where the
general method produces inconsistent results and requires adjustment?
Has SBA chosen the proper anchor points in its formula for
calculating size standards from an industry's average market size? Are
the current minimum size standards too low or too high? Are the current
high anchor points too low or too high?
Has SBA chosen the most appropriate measure to increase
receipts based size standards for both inflation and productivity
growth?
References
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Jobs and the Polarization of the U.S. Labor Market. American
Economic Review, 103(5), 1553-1597. https://doi.org/10.1257/aer.103.5.1553
Autor, D. H., Dorn, D., & Hanson, G. H. (2013). The China Syndrome:
Local Labor Market Effects of Import Competition in the United
States. American Economic Review, 103(6), 2121-2168. https://doi.org/10.1257/aer.103.6.2121
Acemoglu, D., & Restrepo, P. (2020). Robots and Jobs: Evidence from
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Desmet, K., & Fafchamps, M. (2006). Employment Concentration Across
U.S. Counties. Regional Science and Urban Economics, 36(4), 482-509.
https://doi.org/10.1016/j.regsciurbeco.2006.03.004
Ellison, G., & Glaeser, E. L. (1997). Geographic Concentration in
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Political Economy, 105(5), 889-927. https://doi.org/10.1086/262098
Fowler, C.S. (2024). New Commuting Zone Delineation for the U.S.
Based on 2020 Data. Scientific Data, 11(975). https://doi.org/10.1038/s41597-024-03829-5
Fowler, C.S., Rhubart, DC, & Jensen, L. (2016). Reassessing and
Revising Commuting Zones for 2010: History, Assessment, and Updates
for U.S. `Labor-sheds' 1990-2010. Population Research and Policy
Review, 35(2), 263-286. https://doi.org/10.1007/s11113-016-9386-0
Gervais, A., & Jensen, J. B. (2019). The Tradability of Services:
Geographic Concentration and Trade Costs. Journal of International
Economics, 118, 331-350. https://doi.org/10.1016/j.jinteco.2019.03.003
Heckman, J. (1974). Shadow Prices, Market Wages, and Labor Supply.
Econometrica: Journal of the Econometric Society, 679-694. https://doi.org/10.2307/1913937.
Jha P., Neumark D., & Rodriguez-Lopez A., ``What's Across the
Border? Re-Evaluating the Cross-Border Evidence on Minimum Wage
Effects,'' NBER Working Paper 32901 (2024), https://doi.org/10.3386/w32901.
Mayo, J.W., Press, R., & Whitener, M. (2025). Understanding Early-
Stage Merger Investigations: What Drives the Antitrust Agencies?.
Review of Industrial Organization, 67(2), 133-159. https://doi.org/10.1007/s11151-025-10020-6
Tolbert, C.M. & Sizer, M. (1996). U.S. Commuting Zones and Labor
Market Areas: A 1990 Update (Staff Paper No. AGES-9614). U.S.
Department of Agriculture, Economic Research Service. https://doi.org/10.22004/ag.econ.278812
11. Appendix
BILLING CODE 8026-09-P
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Kelly Loeffler,
Administrator.
[FR Doc. 2026-17039 Filed 8-19-26; 8:45 am]
BILLING CODE 8026-09-C