The Trump administration is preparing what could amount to its biggest gift yet to private equity and venture capital groups. A sweeping federal rule change would rewrite the definition of what the federal government considers a small business, with vast implications for federal contracting and financing. Former federal officials, government procurement experts, and corporate law firms expect the new rule, if enacted, to turbocharge buyouts and bailouts throughout the whole economy, with the spoils floating up to private investment funds.
The rule change targets the Small Business Administration (SBA), a small but mighty agency in the federal bureaucracy. Though the SBA has never in its more than 70 years of operation had an enormous budget—and the Trump administration this year has proposed slashing what it has by almost 75 percent—the agency plays an outsized role in the economy and in federal contracting. It marshals the resources of the federal government to guarantee loans, bringing down risk for private lenders and interest rates for small businesses. It certifies businesses as officially “small” in order to give them priority in federal contracting, 23 percent of which is required to go to small businesses each year. It has sweeping authority to provide disaster relief money, which it did to the tune of more than $1 trillion during the COVID-19 pandemic, despite fears of mismanagement and fraud that proved largely true. And it licenses and finances private investment vehicles whose portfolios consist exclusively of small businesses.
Should the rule change go into effect as expected, those powers would be unlocked for businesses that cannot reasonably be considered small. Businesses with thousands of employees, hundreds of millions of dollars in revenue, and in some cases up to $5 billion in assets will be eligible for all the spoils of the SBA’s opportunities, to the near-universal revulsion of actual small businesses, hundreds of which have publicly opposed the measure.
In some cases, the rule change would lift the annual revenue cap of “small” businesses from a few million to hundreds of millions of dollars.
The agency will be drafting a final version of the rule after its fast-tracked 30-day public comment period elapses on September 21. Previously, rule changes of this kind took months from start to finish.
In some cases, the rule change would lift the annual revenue cap of many kinds of “small” businesses from a few million to hundreds of millions of dollars. The annual revenue cap for charter bus companies, for instance, would jump from $19 million to $81 million. Businesses geared toward “soil preparation, planting, and cultivating” would jump from $9.5 million to $624 million. Marine cargo handling firms would go from a max of $47 million per annum to $671 million.
In other cases, the SBA would raise the maximum number of employees a small business can have on its payroll by two- or threefold. And in still others, the agency would change how it determined small business status altogether, shifting from judging by a company’s annual revenue to its total number of employees. That would be the case for most kinds of farming activities. Dairy farms, formerly designated small businesses if they reported under $2.5 million in revenue, would qualify with any amount of revenue so long as they have under 3,000 employees, should the new rule go into effect. Real estate investment companies would get similar treatment.
So would commercial construction, engineering, and energy firms, and mining companies.
Those industries, in particular, are set to take center stage in Big Tech’s highly lucrative data center build-out, supplying labor, power, and critical minerals. Now, many of them, regardless of the revenue they generate, could be seen as small businesses, eligible for preferred loans in the service of building infrastructure for the likes of Google, Amazon, and Meta.
The SBA and the Department of Labor have been rolling out new apprenticeship programs focused on training workers to build data centers and other infrastructure for the AI giants. The agency announced one of those efforts at an expo alongside Sam Altman’s OpenAI, and specifically said that the initiative would “promot[e] capital and contracting opportunities for domestic producers.” Reading between the lines, the new standards for small business may soon be put to use to facilitate OpenAI’s and others’ needs in the data center space.
Legitimately small businesses, many of which depend on the federal contracting preferences and low-interest financing options their small status affords, fear they will soon have to compete with much larger firms for the same scarce resources. Already regularly fielding buyout offers, they might be more likely to succumb to the pressure, seeing no other paths forward to survive, they say.
“Not a week goes by where a private equity firm doesn’t reach out and ask if I want to sell the company, and I don’t know any other small to medium-sized engineering firm that doesn’t have the exact same thing,” said Suzanne Unger Young, who runs North Carolina–based Three Oaks Engineering and has around 70 employees.
White-shoe law firms specializing in private equity deals are preparing for that outcome. Last month, Holland & Knight and McDermott Will & Schulte put out “alerts” to their private equity clients on the proposed rule, advising them on ways to cash in. According to Holland & Knight attorneys, the proposed rule’s “dramatically higher” upper limits for company size and annual revenue––in some cases a full 65 times higher––offer far greater opportunities to merge companies or add them to a portfolio while still qualifying for all the benefits of small business status.
The rule change would also likely encourage private equity firms to form special investment vehicles licensed by the SBA, which carry with them hundreds of millions of dollars in matching funds from the feds. The higher upper bounds for annual revenue, per Holland & Knight attorneys, would give a private equity firm’s portfolio companies “time to grow.” Those companies could win massive federal contracts while remaining under the threshold, potentially building up to “higher valuations at exit,” should an investment firm later choose to sell them off.
That would align with a trend of increased concentration across the economy, which has correlated with higher prices, reduced quality, flattened innovation, diminished wages, and impositions of market power that threaten the economic liberty of consumers, workers, entrepreneurs, and society at large.
According to former SBA officials, the new rule would take the agency in an entirely new direction, away from its mandate to shield independent proprietors from domination by big corporations and stimulate small-scale entrepreneurship, in the service of the Trump administration’s fixation on propping up private capital in key industries like critical minerals, weapons, and AI.
“You might see a lot of mergers and acquisition, and a lot of private equity play, especially with innovative companies and technology, especially with the push with DOD [Department of Defense] defense and technology and cyber and drone,” said John Shoraka, a former associate administrator at the SBA. “In the more broad perspective of creating and nurturing an ecosystem where true small startups and small businesses are protected, it completely eats away at that.”
The Trump administration has already put much of the infrastructure in place to do just that. Over the summer, the SBA signed agreements with the Department of Defense, the Department of Energy, and NASA to funnel federal money into investments with private capital to build out weapons, minerals supply chains, and energy infrastructure. In a statement, an SBA spokesperson said the spending is “essential to restoring American industrial dominance and national security.” Those much-hyped industrial and national security investments have been consistently pilloried by lawmakers and advocates for shuttling taxpayer money into ventures backed by friends of the administration, federal officials, and the Trump family, while failing to meet actual strategic goals.
“The SBA is being harnessed to accelerate consolidation, to reward companies that are close to the Trump administration, and to enable much bigger businesses to gain access to the kind of benefits and programs that exist,” said Stacy Mitchell, a senior researcher at the Institute for Local Self-Reliance, a nonprofit that focuses on community development.
It would make sense that hiking the upper bound for qualifying as a small business so dramatically––by 2, 10, even 65 times––would add many more firms to the eligible list. But the SBA doesn’t expect that to happen. The agency projects the pool of eligible small businesses to expand by about 100,000 firms, which amounts to a less than 2 percent increase all told. Of those roughly 100,000 companies, about a third are already federal contractors that last year held more than $70 billion in contracts.
That bump alone may be enough to force many genuinely small businesses out of federal contracting altogether. But the stats back up something else that analysts have been saying the last few years: After decades of aggressive buyouts and mergers, the middle market of the American economy is hollow. Small businesses look like they’re next.
