It seems we’ve all known that SBA has two size standards defining “Small Business” since the beginning of time: Industry Size Standards and Alternative Size Standards. Over the years the names have changed, but the meanings are the same – Industry Size Standards vary from NAICS to NAICS, while Alternative Size Standards are based on the Tangible Net Worth and the Net Profit After Taxes for the business and its affiliates.
Calculating Size Standards. It’s a tangled web. The Alternative Size Standards take the Tangible Net Worth of the business and the average NPAT over the last two years of tax returns. If the Tangible Net Worth is $15 million or less and the Average NPAT is $5 million or less, the business is small. (SOP 50 10 6, Part 2, Section A, Chapter 1, D, pg. 119)
And of course if the U. S. Department of Labor said the project was in a Labor Surplus Area as of the previous July 1, size standards increase by 25%. Oh, I know there are lots more details, having to do with primary industry, affiliates, partial year returns, months without “’r’s” and so on.
The confusion lies in what to use to calculate the size standard.
Size Standards: Math 101. Let’s begin with the last two fiscal year-end tax returns. Most businesses have a fiscal year that matches the calendar and so their fiscal year end is December 31. SBA expects that businesses will follow the law and file their taxes for the previous fiscal year by October 15. This is December so by now most businesses should have taxes for 2018 and 2019. (Note: If a business has a different fiscal year end, remember that it has about 9 ½ months after its FYE to file taxes.) An SBA lender should pull the average net after tax income from 2018 and 2019 federal taxes. If it is equal to or less than $15 million, we’re half-way there.
What about Tangible Net Worth? Lender calculations are all over the map. Some lenders use the most recent business balance sheet. Others use the Tangible Net Worth in the last filed tax return. Others average the Tangible Net Worth over the last two years. And still others let their lending software figure it out and hope their software vendor is right.
It’s all easier than that. Just as SBA uses the last two year-end t1 axes to determine NPAT, the Agency uses taxes to determine Tangible Net Worth. The difference is that TNW is not averaged. It is whatever the most recent FYE tax return/statement says it is. Nothing more and nothing less. If it is equal to or less than $5 million, that’s the other half and we have a small business!
Well, except: Advanced Calculations. You don’t have to be smarter than a 5th grader to find Tangible Net Worth. But you must have a high degree of lender savvy. Tangible Net Worth doesn’t just pop off the tax return and say, “I’m here! I’m here!!” A less shrewd lender figures that Net Worth is the difference between Assets and Liabilities and after calculating that says, “I’m good.” Remember: we’re looking for Tangible Net Worth. And that means we deduct all intangible assets from our calculations.
So the calculation looks something like this: Capital Stock + Additional Paid in Capital + Retained Earnings + Adjustments to shareholders equity – Cost of Treasury Stock – Net Intangible Assets = Tangible Net Worth.
It adds up after all!
Here’s wishing you and yours a safe and happy Holiday Season
Senior Associate, CD/504 Program