The Definition of “Small” Is About to Change
By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- SBA proposed rules on August 20, 2026, with comments due September 21, 2026. Together they would be the biggest rewrite of small business size standards in decades.
- The methodology drops from seven factors to three. The resulting table collapses from roughly 1,000 size standards across 102 thresholds down to 338 standards set at the four digit and five digit NAICS levels.
- Thresholds only move up. Every industry gets a floor of at least 500 employees or $30.6 million in receipts, and some increases are dramatic, such as computer systems design moving from $34 million to $531 million.
- Most industries would shift from receipts to headcount. That removes the benefit cliff where one large contract pushes a company's revenue average past the line and out of small business status.
- SBA 7(a) and 504 loan eligibility runs through the same standards. A lower middle market company told it had outgrown SBA financing two years ago may be back inside the line once these rules are final.
Most owners never think about what makes their company small in the eyes of the federal government. It is a technical label buried in a table of NAICS codes. Then one day it matters. You want an SBA loan to buy out your partner. You want to bid on a set aside contract. You want to buy a competitor without losing a status you have spent years building around. Suddenly a number you never chose is deciding what you are allowed to do.
That number is about to move. On August 20, 2026, the U.S. Small Business Administration published two related proposed rules in the Federal Register. Together they would restructure small business size standards more than anything the agency has done in a generation. Comments are due September 21, 2026.
What the SBA Actually Proposed
The first proposed rule rewrites the methodology, meaning the analytical framework SBA uses to decide where the line sits. The old approach used seven factors. The new one uses three, combined into a single measure the agency calls average market size.
The second proposed rule applies that methodology to the actual table. Today there are roughly 1,000 industry specific size standards spread across 102 different threshold levels. The proposal collapses that into 338 standards, set at the four digit and five digit NAICS levels rather than six digits.
A few pieces stand out.
Thresholds go up, not down. SBA proposes no reductions at all, even in the 45 industries where its own analytics would support a decrease. It also proposes floors: every industry gets at least a 500 employee standard or a $30.6 million receipts standard, and the old hard caps disappear.
The increases are not modest. Computer systems design and related services would move from $34 million in average annual receipts to $531 million. Engineering services would move from $25.5 million to $252 million.
Most industries would shift from receipts to headcount. Under the proposal, employee based standards become the default wherever SBA has discretion.
The universe of small businesses grows. SBA estimates about 114,541 additional businesses would qualify as small, including roughly 37,002 firms that held fiscal year 2025 federal contracts worth more than $71 billion.
Why This Matters Even If You Never Bid on a Federal Contract
Most of the commentary on these rules comes from the government contracting world, and for good reason. Set aside eligibility is where size standards bite hardest, and the eighteen existing contracting exceptions would be eliminated.
But size standards reach further than that. Eligibility for SBA 7(a) and 504 financing runs through the same regulations. A borrower qualifies as small either under the industry size standard for its NAICS code or under the alternative size standard, which currently looks at tangible net worth of no more than $20 million and average net income after federal taxes of no more than $6.5 million over the two prior fiscal years.
For most Main Street borrowers, the alternative standard already does the work, so higher industry thresholds will not change much. For the larger end of the lower middle market, though, the industry standard is sometimes the tighter constraint, and a company that outgrew it may find itself back inside. If you were told two years ago that your company was too big for SBA financing, that answer is worth revisiting once these rules are final.
The Headcount Shift Is the Quiet Headline
Here is the change we expect owners to feel most.
Under a receipts based standard, growth can punish you. Win one large contract, watch your five year average receipts climb, and you lose small business status. The industry has a name for it: the benefit cliff. Owners have turned down work, or structured around it, purely to stay under a revenue line.
Measure size by employees instead and that dynamic mostly disappears. Revenue can grow without moving your size status. Companies that graduated out on revenue while keeping headcount flat may find themselves eligible again.
That is genuinely good news for growth minded operators. It is less good news if you are the biggest fish in a small pond. Incumbents who have enjoyed limited competition in set aside procurements should expect a larger and more experienced field, thinner margins, and a wave of size protests during the transition as everyone tests the new boundaries.
What We Would Do Now
Pull your NAICS codes and check them against the proposed table. Not the code you think you use; the codes actually on your registrations, your contracts, and your loan file. Consolidation to four digit groups means some companies land in a category they did not expect.
Run your size both ways. Calculate where you sit on average annual receipts and on average headcount, including affiliates. Affiliation rules are not changing, and they still count the receipts and employees of every domestic and foreign affiliate.
Revisit deals you shelved. Higher thresholds create room for combinations that used to be impossible, including small to small acquisitions and joint ventures between two firms that previously could not team without jeopardizing eligibility for both.
Do not build the whole company on set aside work. Buyers discount it, and for good reason. Whatever runway the new thresholds give you, a future acquirer still wants to see durable customers and earnings that survive the loss of a status.
Comment if you have data. SBA has signaled it intends to move forward. If a proposed threshold in your industry does not reflect how your market actually works, the window to say so with numbers attached closes September 21, 2026.
These are proposed rules. They can change, and the final version may look different from the August draft. What will not change is the underlying lesson: the rules that define your company's options are written by people who do not know your business, and they move. Owners who track those rules make better decisions about when to grow, when to buy, and when to sell.
Our team at Warren Kalyan works with founders, owners, and operators of smaller and lower middle market companies on exactly these questions, from entity structure and affiliation analysis to acquisition and financing strategy.
Wondering where the new size standards leave your company?
Initial consultations are no charge. Senior attorney access from day one.
Schedule a consultationhello@warrenkalyan.com | (512) 347-8777 TX | (212) 516-6513 NY | warrenkalyan.com | @warrenkalyan
General information only, not legal advice for your specific situation.