New regulations from the SBA pose a threat to mergers and acquisitions for small businesses.

A recent shift in Small Business Administration (SBA) regulations has sent shockwaves through the arena of small business mergers and acquisitions within the federal government contracting sector. Effective as of January 17, 2026, these new rules possess significant implications for owners of small businesses that have obtained set-aside contracts. According to insights shared by the Office of Management and Budget’s Jason Miller, the federal government relies heavily on tens of thousands of small businesses for a diverse array of goods and services. These businesses are operated by a diverse range of individuals, from women to service-disabled veterans, husband-and-wife duos, and immigrants introducing innovative technologies or services.

The enactment of these new regulations unveils a considerable challenge for small business owners in the federal arena looking to sell their companies. One of the key shifts pertains to the post-acquisition scenario where the new entity, failing to maintain the size or program status requirements under which the former owner secured contracts, may be unable to exercise option years on those contracts. This development significantly alters the landscape for many Baby Boomer owners, diminishing their prospects of transitioning into retirement by selling their companies.

In light of these changes, a scenario exemplified by a service-disabled veteran named “Raul” based in Huntsville, Alabama, further highlights the disruptive implications of the impending regulations. Raul operates a cybersecurity business that fits into the small business category based on a North American Industry Classification System (NAICS) code revenue threshold of $34.5 million. Over the past five years, Raul has maintained an average annual revenue of $10 million, with a backlog of over $50 million. Notably, this backlog serves as a critical factor in determining the value that a prospective acquirer is willing to pay for Raul’s service-disabled veteran-owned small business (SDVOSB) company.

Presently, if Raul were to sell his company, his acquirer would be required to submit a “disqualifying” recertification within 30 days of the acquisition unless the acquirer also qualifies as a small business. Subsequently, the acquirer would be permitted to legitimately execute the $50 million backlog, even if they may not be eligible to pursue all of Raul’s contracts. However, as of January 17, 2026, a different narrative unfolds for Raul and others in his position where acquirers will be unable to utilize option years on contracts post-sale. In this altered scenario, prospective buyers after the specified date may offer a substantially reduced purchase price, posing a setback for entrepreneurs like Raul.

While there are some mitigating provisions within the SBA rule that offer slight relief from the impending impact on valuation, it is crucial for owners of such businesses to prepare for the changes expected to transpire next year. Notably, these rules will primarily affect multiple award contracts involving more than one awardee, thus exempting direct contract awards to individuals like Raul from certain limitations. Likewise, indefinite delivery/indefinite quantity or blanket purchase agreements exclusive to Raul will remain unaffected by these alterations.

Given that numerous owners of small businesses in government contracting invest a significant portion of their assets into business expansion, the sale of their company stands as a pivotal financial transaction in their lives. With the impending regulations taking effect post-January 17, 2026, the worth attached to such transactions is anticipated to be diminished, presenting a challenge for small business owners aiding in fortifying the nation’s procurement of essential goods and services and contributing to a resilient supply chain.