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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG36

Small Business Size Standards: Arts, Entertainment, and Recreation

AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
SUMMARY: The U.S. Small Business Administration (SBA) proposes to increase the small business size standards for 17 industries in North American Industry Classification System (NAICS) Sector 71, Arts, Entertainment, and Recreation. As part of its ongoing comprehensive review of all size standards, SBA has evaluated all size standards in NAICS Sector 71 to determine whether the existing size standards should be retained or revised. This proposed rule is one of a series of proposed rules that examines size standards of industries grouped by NAICS Sector. SBA issued a White Paper entitled "Size Standards Methodology" and published a notice in the October 21, 2009 issue of theFederal Registerthat the document is available on its Web site atwww.sba.gov/sizefor public review and comments. The "Size Standards Methodology" White Paper explains how SBA establishes, reviews and modifies its receipts based and employee based small business size standards. In this proposed rule, SBA has applied its methodology that pertains to establishing, reviewing and modifying a receipts based size standard.
DATES: SBA must receive comments to this proposed rule on or before September 17, 2012.
ADDRESSES: You may submit comments, identified by RIN 3245-AF36, by one of the following methods: (1) FederaleRulemaking Portal:www.regulations.gov; follow the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street, SW., Mail Code 6530, Washington, DC 20416. SBA will not accept comments submitted by email.

SBA will post all comments to this proposed rule onwww.regulations.gov. If you wish to submit confidential business information (CBI) as defined in the User Notice atwww.regulations.gov, you must submit such information to U.S. Small Business Administration, Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street, SW., Mail Code 6530, Washington, DC 20416, or send an email tosizestandards@sba.gov.Highlight the information that you consider to be CBI and explain why you believe SBA should hold this information as confidential. The SBA will review your information and determine whether it will make the information public.

FOR FURTHER INFORMATION CONTACT: Jorge Laboy-Bruno, Economist, Size Standards Division, (202) 205-6618 orsizestandards@sba.gov.
SUPPLEMENTARY INFORMATION:

To determine eligibility for Federal small business assistance, SBA establishes small business definitions (referred to as size standards) for private sector industries in the United States. SBA uses two primary measures of business size—average annual receipts and average number of employees. SBA uses financial assets, electric output, and refining capacity to measure the size of a few specialized industries. In addition, SBA's Small Business Investment Company (SBIC), Certified Development Company (504) and 7(a) Loan Programs use either the industry based size standards or net worth and net income based alternative size standards to determine eligibility for those programs. At the start of the current comprehensive size standards review, there were 41 different size standards covering 1,141 NAICS industries and 18 sub-industry activities (“exceptions” in SBA's Table of size standards). Thirty-one of these size standards were based on average annual receipts, seven were based on average number of employees, and three were based on other measures.

Over the years, SBA has received comments that its size standards have not kept up with changes in the economy, in particular the changes in the Federal contracting marketplace and industry structure. The last time SBA conducted a comprehensive review of all size standards was during the late 1970s and early 1980s. Since then, most reviews of size standards were limited to a few specific industries in response to requests from the public and Federal agencies. SBA also makes periodic inflation adjustments to its monetary based size standards. The SBA's latest inflation adjustment to size standards was published in theFederal Registeron July 18, 2008 (73 FR 41237).

Because of changes in the Federal marketplace and industry structure since the last overall review, SBA recognizes that current data may no longer support some of its existing size standards. Accordingly, in 2007, SBA began a comprehensive review of all size standards to determine if they are consistent with current data, and to adjust 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). The Jobs Act directs SBA to conduct a detailed review of all size standards and to make appropriate adjustments to reflect market conditions. Specifically, the Jobs Act requires SBA to review at least one-third of all size standards during every 18-month period from the date of its enactment and do a complete review of all size standards not less frequently than once every 5 years thereafter. Reviewing existing small business size standards and making appropriate adjustments based on current data are also consistent with Executive Order 13563 on improving regulation and regulatory review.

Rather than review all size standards at one time, SBA is reviewing a group of industries within an NAICS Sector. An NAICS Sector generally consists of 25 to 75 industries, except for the manufacturing sector, which has considerably more industries. Once SBA completes its review of size standards for industries in an NAICS Sector, it will issue a proposed rule to revise size standards for those industries for which currently available data and other relevant factors support doing so.

Below is a discussion of SBA's size standards methodology for establishing receipts based size standards, which SBA applied to this proposed rule, including analyses of industry structure, Federal procurement trends and other factors for industries reviewed in this proposed rule, the impact of the proposed revisions to size standards on Federal small business assistance, and the evaluation of whether a revised size standard would exclude dominant firms from being considered small.

Size Standards Methodology

SBA has recently developed a “Size Standards Methodology” for establishing, reviewing and modifying size standards when necessary. SBA has published this document on its Web site atwww.sba.gov/sizefor public review and comments and also included it, as a supporting document, in the electronic docket of this proposed rule atwww.regulations.gov. SBA does not apply every feature of its methodology to every size standard evaluation because not all features are appropriate for every industry. For example, since all industries in NAICS Sector 71 have receipts based size standards, the methodology described in this proposed rule applies to establishing receipts based standards. However, the methodology is made available in its entirety for parties who are interested in SBA's overall approach to establishing, evaluating, and modifying small business size standards. SBA always explains its analysis in individual proposed and final rules relating to size standards for specific industries.

SBA welcomes comments from the public on a number of issues concerning its “Size Standards Methodology,” such as suggestions on alternative approaches to establishing and modifying size standards; whether there are alternative or additional factors that SBA should consider; whether SBA's approach to small business size standards makes sense in the current economic environment; whether SBA's use of anchor size standards is appropriate in the current economy; whether there are gaps in SBA's methodology because of the lack of comprehensive data; and whether there are other facts or issues that SBA should consider. Comments on the SBA's methodology should be submitted via: (1) the Federal eRulemaking Portal:www.regulations.gov; the docket number is SBA-2009-0008; follow the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. As with comments received to this and other proposed rules, SBA will post all comments on its methodology onwww.regulations.gov. As of July 18, 2012, SBA has received 13 comments to its “Size Standards Methodology.” The comments are available to the public atwww.regulations.gov. SBA continues to welcome comments on its methodology from interested parties.

Congress granted discretion to SBA's Administrator to establish detailed small business size standards. 15 U.S.C.632(a)(2). Section 3(a)(3) of the Small Business Act (15 U.S.C. 632(a)(3)) requires that “* * * the [SBA] 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.” Accordingly, the economic structure of an industry serves as the underlying basis for developing and modifying small business size standards. SBA identifies the small business segment of an industry by examining data on the economic characteristics defining the industry structure itself (as described below). In addition to the analysis of an industry's structure, SBA also considers current economic conditions, together with its own mission, program objectives, and the Administration's current policies, suggestions from industry groups and Federal agencies, and public comments on the proposed rule, when it establishes small business size standards. SBA also examines whether a size standard based on industry and other relevant data successfully exclude businesses that are dominant in the industry.

This proposed rule includes information regarding the factors SBA evaluated and the criteria the Agency used to propose any adjustments to size standards in NAICS Sector 71. It also explains why SBA has proposed to adjust some size standards in NAICS Sector 71 but not others. This proposed rule affords the public an opportunity to review and comment on SBA's proposals to revise size standards in NAICS Sector 71 as well as on the data and methodology it uses to evaluate and revise a size standard.

Industry Analysis

For the current comprehensive size standards review, SBA has established three “base” or “anchor” size standards—$7.0 million in average annual receipts for industries that have receipts based size standards, 500 employees for manufacturing and other industries that have employee based size standards (except for Wholesale Trade), and 100 employees for industries in the Wholesale Trade Sector. SBA established 500 employees as the anchor size standard for manufacturing industries at its inception in 1953. Shortly thereafter, SBA established $1 million in average annual receipts as the anchor size standard for nonmanufacturing industries. SBA has periodically increased the receipts based anchor size standard for inflation, and it stands today at $7 million. Since 1986, SBA has set 100 employees as the size standard for all industries in the Wholesale Trade Sector for SBA's financial assistance programs. However, NAICS codes for Wholesale Trade Industries (NAICS Sector 42) and their 100 employee size standards for the Wholesale Trade Sector do not apply to Federal procurement programs. Rather, for Federal procurement purposes the size standard is 500 employees for all industries in Wholesale Trade (NAICS Sector 42), and for all industries in Retail Trade (NAICS Sector 44-45) under the SBA's nonmanufacturer rule (13 CFR 121.406(b)).

These long-standing anchor size standards have stood the test of time and gained legitimacy through practice and general public acceptance. An anchor size standard is neither a minimum nor a maximum. It is a common size standard for a large number of industries that have similar economic characteristics and serves as a reference point in evaluating size standards for individual industries. SBA uses the anchor in lieu of trying to establish precise small business size standards for each industry. Otherwise, theoretically, the number of size standards might be as high as the number of industries for which SBA establishes size standards (1,141). Furthermore, the data SBA analyzes are static, but the U.S. economy is not. Hence, absolute precision is impossible. Therefore, SBA presumes an anchor size standard is appropriate for a particular industry unless that industry displays economic characteristics that are considerably different from others with the same anchor size standard.

When evaluating a size standard, SBA compares the economic characteristics of the specific industry under review to the average characteristics of industries with one of the three anchor size standards (referred to as the “anchor comparison group”). This allows SBA to assess the industry structure and to determine whether the industry is appreciably different from the other industries in the anchor comparison group. If the characteristics of a specific industry under review are similar to the average characteristics of the anchor comparison group, the anchor size standard is considered appropriate for that industry. SBA may consider adopting a size standard below the anchor when: (1) All or most of the industry characteristics are significantly smaller than the average characteristics of the anchor comparison group; or (2) other industry considerations strongly suggest that the anchor size standard would be an unreasonably high size standard for the industry.

If the specific industry's characteristics are significantly higher than those of the anchor comparison group, a size standard higher than the anchor size standard may be appropriate. The larger the differences are between the characteristics of the industry under review and those of the anchor comparison group, the larger will be the difference between the appropriate industry size standard and the anchor size standard. To determine a size standard above the anchor size standard, SBA analyzes the characteristics of a second comparison group. For industries with receipts based size standards, including those in NAICS Sector 71 that are reviewed in this proposed rule, SBA has developed a second comparison group consisting of industries with the highest levels of receipts based size standards. To determine the level of a size standard above the anchor size standard, SBA analyzes the characteristics of this second comparison group. The size standards for this group of industries range from $23 million to $35.5 million in average annual receipts, with the weighted average size standard for the group being $29 million. SBA refers to this comparison group as the “higher level receipts based size standard group.”

The primary factors that SBA evaluates when analyzing the structural characteristics of an industry include average firm size, startup costs and entry barriers, industry competition, and distribution of firms by size. SBA also evaluates, as an additional primary factor, the possible impact that revising size standards might have on Federal contracting assistance to small businesses. These are, generally, the five most important factors SBA examines when establishing or revising a size standard for an industry. However, SBA will also consider and evaluate other information that it believes is relevant to a particular industry (such as technological changes, growth trends, SBA's financial assistance, other program factors,etc.). SBA also considers possible impacts of size standard revisions on eligibility for Federal small business assistance, current economic conditions, the Administration's policies, and suggestions from industry groups and Federal agencies. Public comments on a proposed rule also provide important additional information. SBA thoroughly reviews all public comments before making a final decision on its proposed size standard. Below are brief descriptions of each of the five primaryfactors that SBA has evaluated in each industry in NAICS Sector 71 being reviewed in this proposed rule. A more detailed description of this analysis is provided in the SBA's “Size Standards Methodology,” available athttp://www.sba.gov/size.

1.Average firm size.SBA computes two measures of average firm size: Simple average and weighted average. For industries with receipts based size standards, the simple average is the total receipts of the industry divided by the total number of firms in the industry. The weighted average firm size is the sum of weighted simple averages in different receipts size classes, where weights are the shares of total industry receipts for respective size classes. The simple average weighs all firms within an industry equally, regardless of their size. The weighted average overcomes that limitation by giving more weight to larger firms.

If the average firm size of an industry under review is significantly higher than the average firm size of industries in the anchor comparison industry group, this will generally support a size standard higher than the anchor size standard. Conversely, if the industry's average firm size is similar to or significantly lower than that of the anchor comparison industry group, it will be a basis to adopt the anchor size standard, or, in rare cases, a standard lower than the anchor.

2.Startup costs and entry barriers.Startup costs reflect a firm's initial size in an industry. New entrants to an industry must have sufficient capital and other assets to start and maintain a viable business. If new firms entering a particular industry have greater capital requirements than firms in industries in the anchor comparison group, this can be a basis for establishing a size standard higher than the anchor standard. In lieu of data on actual startup costs, SBA uses average assets as a proxy measure to assess the levels of capital requirements for new entrants to an industry.

To calculate average assets, SBA begins with the sales to total assets ratio for an industry from the Risk Management Association's Annual Statement Studies. The SBA then applies these ratios to the average receipts of firms in that industry. An industry with a significantly higher level of average assets than that of the anchor comparison group is likely to have higher startup costs; this in turn will support a size standard higher than the anchor. Conversely, if the industry has a significantly smaller average assets compared to the anchor comparison group, the anchor size standard, or, in rare cases, one lower than the anchor, may be appropriate.

3.Industry competition.Industry competition is generally measured by the share of total industry receipts generated by the largest firms in an industry. SBA generally evaluates the share of industry receipts generated by the four largest firms in each industry. This is referred to as the “four-firm concentration ratio,” a commonly used economic measure of market competition. SBA compares the four-firm concentration ratio for an industry under review to the average four-firm concentration ratio for industries in the anchor comparison group. If a significant share of economic activity within the industry is concentrated among a few relatively large companies, all else being equal, SBA will establish a size standard higher than the anchor size standard. SBA does not consider the four-firm concentration ratio as an important factor in assessing a size standard if its value for an industry under review is less than 40 percent. For industries in which the four-firm concentration ratio is 40 percent or more, SBA examines the average size of the four largest firms in determining a size standard.

4.Distribution of firms by size.SBA examines the shares of industry total receipts accounted for by firms of different receipts and employment size classes in an industry. This is an additional factor that SBA evaluates in assessing competition within an industry. If most of an industry's economic activity is attributable to smaller firms, this would indicate that small businesses are competitive in that industry. This supports adopting the anchor size standard. If most of an industry's economic activity is attributable to larger firms, this would indicate that small businesses are not competitive in that industry. This would support adopting a size standard above the anchor.

Concentration among firms is a measure of inequality of distribution. To evaluate the degree of inequality of distribution within an industry, SBA computes the Gini coefficient by constructing the Lorenz curve. The Lorenz curve presents the cumulative percentages of units (firms) along the horizontal axis and the cumulative percentages of receipts (or other measures of size) along the vertical axis. (For further detail, please refer to SBA's “Size Standards Methodology” on its Web site atwww.sba.gov/size.) Gini coefficient values vary from zero to one. If an industry's total receipts reflect equal distribution among the industries, the Gini coefficient will equal zero. If a single firm accounts for an industry's total receipts, the Gini coefficient will equal one.

SBA compares the Gini coefficient value for an industry under review with that for industries in the anchor comparison group. If an industry shows a higher Gini coefficient value than industries in the anchor comparison industry group this may, all else being equal, warrant a higher size standard than the anchor. Conversely, if an industry shows a similar or lower Gini coefficient than industries in the anchor group, the anchor standard, or, in some cases, a standard lower than the anchor, may be adopted.

5.Impact on Federal contracting and SBA's loan programs.SBA examines the possible impact a size standard change may have on Federal small business assistance. This most often focuses on the share of Federal contracting dollars awarded to small businesses in the industry in question. In general, if the small business share of Federal contracting in an industry with significant Federal contracting is appreciably less than the small business share of the industry's total receipts, there is justification for considering a size standard higher than the existing size standard. The disparity between the small business Federal market share and industry-wide small business share may be due to various factors, such as extensive administrative and compliance requirements associated with Federal contracts, different skill sets required for Federal contracts as compared to typical commercial contracting work, and the size of Federal contracts. These, and other factors, will likely influence the type of firms that compete for Federal contracts. By comparing the Federal contracting small business share with the industry-wide small business share, SBA includes in its size standards analysis the latest Federal contracting trends. This analysis may support a size standard larger than the current size standard.

SBA considers Federal contracting trends in the size standards analysis only if: (1) The small business share of Federal contracting dollars is at least 10 percent lower than the small business share of total industry receipts; and (2) the amount of total Federal contracting averages $100 million or more during the latest three fiscal years. These thresholds reflect a significant level of contracting where a revision to a size standard may have an impact on contracting opportunities to small businesses.

Besides the impact on small business Federal contracting, SBA also evaluatesthe influence of a proposed size standard on SBA's loan programs. For this, SBA examines the volume and number of SBA's guaranteed loans within an industry and the size of firms obtaining those loans. This allows SBA to assess whether the existing or proposed size standard for a particular industry may restrict the level of financial assistance to small firms. If the analysis shows that current size standards have impeded financial assistance to small businesses, this can support higher size standards. However, if small businesses under current size standards have been receiving significant amounts of financial assistance through SBA's loan programs, or if the businesses receiving SBA's financial assistance are much smaller than the existing size standards, this factor may not be considered in determining the size standards.

Sources of Industry and Program Data

The SBA's primary source of industry data used in this proposed rule is a special tabulation of the data from 2007 Economic Census (seewww.census.gov/econ/census07/) prepared by the U.S. Bureau of the Census (Census Bureau) for the Agency. The special tabulation provides SBA with data on the number of firms, number of establishments, number of employees, annual payroll, and annual receipts of companies by NAICS Sector (2-digit level), Subsector (3-digit level), Industry Group (4-digit level), Industry (6-digit level). These data are arrayed by various classes of firms' size based on the overall number of employees and receipts of the entire enterprise (all establishments and affiliated firms) from all industries. The special tabulation enables SBA to evaluate average firm size, the four-firm concentration ratio, and distribution of firms by various receipts and employment size classes.

In some cases, where data were not available due to disclosure prohibitions in the Census Bureau's tabulation, SBA either estimated missing values using available relevant data or examined data at a higher level of industry aggregation, such as at the NAICS 2-digit (Sector), 3-digit (Subsector) or 4-digit (Industry Group) level. In some instances, SBA had to base its analysis only on those factors for which data were available or estimates of missing values were possible.

To calculate average assets, SBA used sales to total assets ratios from the Risk Management Association's Annual Statement Studies, 2008-2010.

To evaluate Federal contracting trends, SBA examined data on Federal contract awards for fiscal years 2008-2010. The data are available from the U.S. General Service Administration's Federal Procurement Data System—Next Generation (FPDS-NG).

To assess the impact on financial assistance to small businesses, SBA examined data on its own guaranteed loan programs for fiscal years 2008-2010.

Data sources and estimation procedures SBA uses in its size standards analysis are documented in detail in the SBA's “Size Standards Methodology” White Paper, which is available atwww.sba.gov/size.

Dominance in Field of Operation

Section 3(a) of the Small Business Act (15 U.S.C. § 632(a)) defines a small business concern as one that is: (1) Independently owned and operated; (2) not dominant in its field of operation; and (3) within a specific small business definition or size standard established by the SBA's Administrator. SBA considers as part of its evaluation whether a business concern at a proposed size standard would be dominant in its field of operation. For this, SBA generally examines the industry's market share of firms at the proposed size standard. Market share and other factors may indicate whether a firm can exercise a major controlling influence on a national basis in an industry where a significant number of business concerns are engaged. If a contemplated size standard would include a dominant firm, SBA would consider a lower size standard to exclude the dominant firm from being defined as small.

Selection of Size Standards

To simplify size standards for the ongoing comprehensive review of receipts based size standards, SBA has proposed to select size standards from a limited number of levels. For many years, SBA has been concerned about the complexity of determining small business status caused by a large number of varying receipts based size standards (see69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992)). At the start of current comprehensive size standards review, there were 31 different levels of receipts based size standards. They ranged from $0.75 million to $35.5 million, and many of them applied to one or only a few industries. SBA believes that to have so many different size standards with small variations among them is unnecessary and difficult to justify analytically. To simplify managing and using size standards, SBA proposes that there be fewer size standard levels. This will produce more common size standards for businesses operating in related industries. This will also result in greater consistency among the size standards for industries that have similar economic characteristics.

SBA proposes, therefore, to apply one of eight receipts based size standards to each industry in NAICS Sector 71. The eight “fixed” receipts based size standard levels are $5 million, $7 million, $10 million, $14 million, $19 million, $25.5 million, $30 million, and $35.5 million. To establish these eight receipts based size standard levels, SBA considered the current minimum, the current maximum, and the most commonly used current receipts based size standards. At the start of the current comprehensive size standards review, the most commonly used receipts based size standards clustered around the following: $2.5 million to $4.5 million, $7 million, $9 million to $10 million, $12.5 million to $14.0 million, $25.0 million to $25.5 million, and $33.5 million to $35.5 million. SBA selected $7 million as one of eight fixed levels of receipts based size standards because it is also an anchor standard for receipts based standards. The lowest or minimum receipts based size level will be $5 million. Other than the size standards for agriculture and those based on commissions (such as real estate brokers and travel agents), $5 million include those industries with the lowest receipts based standards, which ranged from $2 million to $4.5 million. Among the higher level size clusters, SBA has set four fixed levels: $10 million, $14 million, $25.5 million, and $35.5 million. Because there are large intervals between some of the fixed levels, SBA also established two intermediate levels: Namely, $19 million between $14 million and $25.5 million, and $30 million between $25.5 million and $35.5 million. These two intermediate levels reflect roughly the same proportional differences as between the other two successive levels.

To simplify size standards further, SBA may propose a common size standard for closely related industries. Although the size standard analysis may support a separate size standard for each industry, SBA believes that establishing different size standards for closely related industries may not always be appropriate. For example, in cases where many of the same businesses operate in the same multiple industries, a common size standard for those industries might better reflect the Federal marketplace. This might also make size standards among related industries more consistent than separate size standards for each of those industries. All industries in NAICSSector 71 currently have the common $7 million size standard. However, the latest industry data neither supported the current common $7 million nor a different common size standard for all industries within the Sector. Furthermore, the industry specific results showed too much variation to support common size standards for industries even at the 4-Digit NAICS Industry Group level.

Evaluation of Industry Structure

SBA evaluated the structure of all 25 industries in NAICS Sector 71, Arts, Entertainment and Recreation, to assess the appropriateness of the current size standards. As described above, SBA compared data on the economic characteristics of each industry in NAICS Sector 71 to the average characteristics of industries in two comparison groups. The first comparison group consists of all industries with $7.0 million size standards and is referred to as the “receipts based anchor comparison group.” Because the goal of SBA's size standards review is to assess whether a specific industry's size standard should be the same as or different from the anchor size standard, this is the most logical group of industries to analyze. In addition, this group includes a sufficient number of firms to provide a meaningful assessment and comparison of industry characteristics.

If the characteristics of an industry under review are similar to the average characteristics of industries in the anchor comparison group, the anchor size standard is generally considered appropriate for that industry. If an industry's structure is significantly different from industries in the anchor group, a size standard lower or higher than the anchor size standard might be appropriate. The level of the new size standard is based on the difference between the characteristics of the anchor comparison group and a second industry comparison group. As described above, the second comparison group for receipts based size standards consists of industries with the highest receipts based size standards, ranging from $23 million to $35.5 million. The average size standard for this group is $29 million. SBA refers to this group of industries as the “higher level receipts based size standard comparison group.” SBA determines differences in industry structure between an industry under review and the industries in the two comparison groups by comparing data on each of the industry factors, including average firm size, average assets size, the four-firm concentration ratio, and the Gini coefficient of distribution of firms by size. Table 1, Average Characteristics of Receipts Based Comparison Groups, below, shows two measures of the average firm size (simple and weighted), the average assets size, the four-firm concentration ratio, the average receipts of the four largest firms, and the Gini coefficient for both anchor level and higher level comparison groups for receipts based size standards.

Table 1—Average Characteristics of Receipts Based Comparison Groups Receipts based comparison group Avg. firm size
  • ($ million)
  • Simple
  • average
  • Weighted
  • average
  • Avg. assets size
  • ($ million)
  • Four-firm
  • concentration
  • ratio
  • (%)
  • Avg. receipts of four largest firms
  • ($ million) *
  • Gini
  • coefficient
  • Anchor Level 1.32 19.63 0.84 16.6 196.4 0.693 Higher Level 5.07 116.84 3.20 32.1 1,376.0 0.830 * To be used for industries with a four-firm concentration ratio of 40% or greater.
    Derivation of Size Standards Based on Industry Factors

    For each industry factor in Table 1, Average Characteristics of Receipts Based Comparison Groups, above, SBA derives a separate size standard based on the differences between the values for the industry under review and the values for the two comparison groups. If the industry value for a particular factor is near the corresponding factor for the anchor comparison group, SBA will consider the $7.0 million anchor size standard appropriate for that factor.

    An industry factor with a value significantly above or below the anchor comparison group will generally warrant a size standard above or below the $7.0 million anchor. The new size standard in these cases is based on the proportional difference between the industry value and the values for the two comparison groups.

    For example, if an industry's simple average receipts are $3.3 million, that would support a $19 million size standard. The $3.3 million level is 52.8 percent between the average firm size of $1.32 million for the anchor comparison group and $5.07 million for the higher level comparison group (($3.30 million−$1.32 million) ÷ ($5.07 million−$1.32 million) = 0.528 or 52.8%). This proportional difference is applied to the difference between the $7.0 million anchor size standard and average size standard of $29 million for the higher level size standard group and then added to $7.0 million to estimate a size standard of $18.616 million ([{$29.0 million−$7.0 million} * 0.528] + $7.0 million = $18.616 million). The final step is to round the estimated $18.616 million size standard to the nearest fixed size standard level, which in this example is $19 million.

    SBA applies the above calculation to derive a size standard for each industry factor. Detailed formulas involved in these calculations are presented in the SBA's “Size Standards Methodology,” available on SBA's Web site atwww.sba.gov/size.(However, note that figures in the “Size Standards Methodology” White Paper are based on 2002 Economic Census data and are different from those presented in this proposed rule. That is because when SBA prepared its “Size Standards Methodology,” the 2007 Economic Census data were not yet available.) Table 2, Values of Industry Factors and Support Size Standards, below, shows ranges of values for each industry factor and the levels of size standards supported by those values.

    Table 2—Values of Industry Factors and Supported Size Standards If
  • simple avg.
  • receipts size
  • ($ million)
  • Or if
  • weighted avg.
  • receipts size
  • ($ million)
  • Or if
  • avg.
  • assets size
  • ($ million)
  • Or if
  • avg. receipts of largest four firms
  • ($ million)
  • Or if
  • Gini coefficient
  • Then
  • size standard is
  • ($ million)
  • <1.15 <15.22 <0.73 <142.8 <0.686 5.0 1.15 to 1.57 15.22 to 26.26 0.73 to 1.00 142.8 to 276.9 0.686 to 0.702 7.0 1.58 to 2.17 26.27 to 41.73 1.01 to 1.37 277.0 to 464.5 0.703 to 0.724 10.0 2.18 to 2.94 41.74 to 61.61 1.38 to 1.86 464.6 to 705.8 0.725 to 0.752 14.0 2.95 to 3.92 61.62 to 87.02 1.87 to 2.48 705.9 to 1,014.1 0.753 to 0.788 19.0 3.93 to 4.86 87.03 to 111.32 2.49 to 3.07 1,014.2 to 1,309.0 0.789 to 0.822 25.5 4.87 to 5.71 111.33 to 133.41 3.08 to 3.61 1,309.1 to 1,577.1 0.823 to 0.853 30.0 >5.71 >133.41 >3.61 >1,577.1 >0.853 35.5
    Derivation of Size Standards Based on Federal Contracting Factor

    Besides industry structure, SBA also evaluates Federal contracting data to assess how successful small businesses are at obtaining Federal contracts under current size standards. For the current comprehensive size standards review, SBA has decided to designate a size standard at one level higher than the current size standard for industries where the small business share of total Federal contracting dollars is 10 to 30 percentage points lower than the small business share of total industry receipts and at two levels higher than the current size standard where the difference is more than 30 percentage points.

    Because of the complex relationships among several variables affecting small business participation in the Federal marketplace, SBA has chosen not to designate a size standard for the Federal contracting factor alone that is higher than two levels above the current size standard. SBA believes that a larger adjustment to size standards based on Federal contracting activity should be based on a more detailed analysis of the impact of any subsequent revision to the current size standard. In limited situations, however, SBA may conduct a more extensive examination of Federal contracting experience. This may enable SBA to support a different size standard than indicated by this general rule and take into consideration significant and unique aspects of small business competitiveness in the Federal contract market. SBA welcomes comments on its methodology of incorporating the Federal contracting factor in the size standard analysis and suggestions for alternative methods and other relevant information on small business experience in the Federal contract market.

    None of the 25 industries in NAICS Sector 71 averaged $100 million or more annually in Federal contracting during fiscal years 2008-2010, suggesting that Federal contracting activity is insignificant in that Sector. In fact, based on data for fiscal years 2008-2010, Federal contracting for the entire Sector was less than $90 million. Accordingly, the Federal contracting factor is not factored in to calculate the new size standards for all industries in NAICS Sector 71.

    New Size Standards Based on Industry Factors

    Table 3, Size Standards Supported by Each Factor for Each Industry (millions of dollars), below, shows the results of analyses of industry factors for each industry in NAICS Sector 71. Many of the NAICS industries in columns 2, 3, 4, 6, and 7 show two numbers. The upper number is the value for the industry factor shown on the top of the column and the lower number is the size standard supported by that factor. For the four-firm concentration ratio, SBA estimates a size standard if its value is 40 percent or more. If the four-firm concentration ratio for an industry is less than 40 percent, there is no estimated size standard for that factor. If the four-firm concentration ratio is more than 40 percent, SBA indicates in column 6 the average size of the industry's top four firms together with a size standard based on that average. As mentioned earlier, since the Federal contracting factor was significant in none of the industries in NAICS Sector 71, no size standard was estimated for that factor. Column 8 shows a calculated new size standard for each industry. This is the average of the size standards supported by each industry factor and rounded to the nearest fixed size level. Analytical details involved in the averaging procedure are described in the SBA's “Size Standard Methodology.” For comparison with the new standards, the current size standards are in column 9 of Table 3, Size Standards Supported by Each Factor for Each Industry (millions of dollars), below.

    Table 3—Size Standards Supported by Each Factor for Each Industry [Millions of dollars] NAICS Code/industry title Simple average firm size
  • ($ million)
  • Weighted average firm size
  • ($ million)
  • Average assets size
  • ($ million)
  • Four-firm ratio
  • (%)
  • Four-firm average size
  • ($ million)
  • Gini
  • coefficient
  • Calculated new size standard
  • ($ million)
  • Current size standard
  • ($ million)
  • (1) (2) (3) (4) (5) (6) (7) (8) (9) 711110Theater Companies and Dinner Theaters $2.1
  • 10.0
  • $28.0
  • 10.0
  • $1.6
  • 14.0
  • 14.7 $252.7 0.793
  • $25.5
  • $19.0
  • $7.0
  • 711120Dance Companies 1.1
  • 7.0
  • 15.1
  • 5.0
  • 23.1 34.5 0.738
  • $14.0
  • 10.0
  • 7.0
  • 711130Musical Groups and Artists 1.1
  • 5.0
  • 16.0
  • 7.0
  • 1.3
  • 10.0
  • 6.8 87.6 0.728
  • $14.0
  • 10.0
  • 7.0
  • 711190Other Performing Arts Companies 2.5
  • 14.0
  • 227.4
  • 35.5
  • 64.6 156.4
  • 7.0
  • 0.867
  • $35.5
  • 25.5
  • 7.0
  • 711211Sports Teams and Clubs 25.1
  • 35.5
  • 152.4
  • 35.5
  • 26.8
  • 35.5
  • 7.5 353.2 0.833
  • $30.0
  • 35.5
  • 7.0
  • 711212Race Tracks 13.4
  • 35.5
  • 162.3
  • 35.5
  • 11.8
  • 35.5
  • 30.5 624.5 0.886
  • $35.5
  • 35.5
  • 7.0
  • 711219Other Spectator Sports 1.3
  • 7.0
  • 20.1
  • 7.0
  • 14.5 124.1 0.727
  • $14.0
  • 10.0
  • 7.0
  • 711310Promoters of Performing Arts, Sports and Similar Events with Facilities 4.2
  • 25.5
  • 69.7
  • 19.0
  • 5.7
  • 35.5
  • 37.6 920.7 0.852
  • $30.0
  • 30.0
  • 7.0
  • 711320Promoters of Performing Arts, Sports and Similar Events without Facilities 1.6
  • 10.0
  • 32.5
  • 10.0
  • 24.8 393.5 0.756
  • $19.0
  • 14.0
  • 7.0
  • 711410Agents and Managers for Artists, Athletes, Entertainers and Other Public Figures 1.4
  • 7.0
  • 25.2
  • 7.0
  • 16.8 207.1 0.736
  • $14.0
  • 10.0
  • 7.0
  • 711510Independent Artists, Writers, and Performers 0.6
  • 5.0
  • 7.5
  • 5.0
  • 3.1 100.4 0.581
  • $5.0
  • 5.0
  • 7.0
  • 712110Museums 2.0
  • 10.0
  • 39.8
  • 10.0
  • 6.8
  • 35.5
  • 11.8 270.7 0.823
  • $30.0
  • 25.5
  • 7.0
  • 712120Historical Sites 0.7
  • 5.0
  • 6.8
  • 5.0
  • 18.7 34.1 0.634
  • $5.0
  • 5.0
  • 7.0
  • 712130Zoos and Botanical Gardens 5.1
  • 30.0
  • 42.8
  • 14.0
  • 12.7
  • 35.5
  • 19.1 133.0 0.804
  • $25.5
  • 25.5
  • 7.0
  • 712190Nature Parks and Other Similar Institutions 1.1
  • 5.0
  • 7.9
  • 5.0
  • 29.5 43.9 0.654
  • $5.0
  • 5.0
  • 7.0
  • 713110Amusement and Theme Parks 30.5
  • 35.5
  • 633.7
  • 35.5
  • 36.6
  • 35.5
  • 70.7 2,101.3
  • 35.5
  • 0.926
  • $35.5
  • 35.5
  • 7.0
  • 713120Amusement Arcades 0.7
  • 5.0
  • 9.1
  • 5.0
  • 0.6
  • 5.0
  • 16.5 68.3 0.598
  • $5.0
  • 5.0
  • 7.0
  • 713210Casinos (except Casino Hotels) 67.0
  • 35.5
  • 189.2
  • 35.5
  • 54.4
  • 35.5
  • 15.9 660.0 0.638
  • $5.0
  • 25.5
  • 7.0
  • 713290Other Gambling Industries 5.6
  • 30.0
  • 74.6
  • 19.0
  • 18.4 395.0 0.850
  • $30.0
  • 30.0
  • 7.0
  • 713910Golf Courses and Country Clubs 1.9
  • 10.0
  • 8.3
  • 5.0
  • 3.1
  • 30.0
  • 6.6 347.7 0.640
  • $5.0
  • 14.0
  • 7.0
  • 713920Skiing Facilities 6.6
  • 35.5
  • 64.0
  • 19.0
  • 8.2
  • 35.5
  • 41.9 236.5
  • 7.0
  • 0.817
  • $25.5
  • 25.5
  • 7.0
  • 713930Marinas 1.0
  • 5.0
  • 3.3
  • 5.0
  • 1.4
  • 14.0
  • 3.0 30.7 0.538
  • $5.0
  • 7.0
  • 7.0
  • 713940Fitness and Recreational Sports Centers 0.8
  • 5.0
  • 18.2
  • 7.0
  • 0.8
  • 7.0
  • 15.5 831.8 0.711
  • $10.0
  • 7.0
  • 7.0
  • 713950Bowling Centers 0.9
  • 5.0
  • 22.8
  • 7.0
  • 0.8
  • 7.0
  • 22.1 188.0 0.543
  • $5.0
  • 7.0
  • 7.0
  • 713990All Other Amusement and Recreation Industries 0.5
  • 5.0
  • 3.0
  • 5.0
  • 0.4
  • 5.0
  • 5.7 105.0 0.499
  • $5.0
  • 5.0
  • 7.0
  • Evaluation of SBA Loan Data

    Before deciding on an industry's size standard, SBA also considers the impact of new or revised standards on SBA's loan programs. Accordingly, SBA examined its 7(a) and 504 Loan Program data for fiscal years 2008-2010 to assess whether the existing or proposed size standards need further adjustments to ensure credit opportunities for small businesses through those programs. For the industries reviewed in this rule, the data show that it is mostly small businesses much smaller than the current size standards that use the SBA's 7(a) and 504 loans. Therefore, no size standard in NAICS Sector 71, Arts, Entertainment, and Recreation, needs an adjustment based on this factor.

    Proposed Changes to Size Standards

    Table 4, Summary of Size Standards Analysis, below, summarizes the results of SBA analyses of size standards from Table 3, Size Standards Supported by Each Factor for Each Industry (millions of dollars), above. The results support increases in size standards in 17 industries, decreases in five industries, and no change in three industries.

    Table 4—Summary of Size Standards Analysis NAICS Industry code NAICS Industry title Current size standard
  • ($ million)
  • Calculated new size standard
  • ($ million)
  • 711110 Theater Companies and Dinner Theaters $7.0 $19.0 711120 Dance Companies 7.0 10.0 711130 Musical Groups and Artists 7.0 10.0 711190 Other Performing Arts Companies 7.0 25.5 711211 Sports Teams and Clubs 7.0 35.5 711212 Race Tracks 7.0 35.5 711219 Other Spectator Sports 7.0 10.0 711310 Promoters of Performing Arts, Sports and Similar Events with Facilities 7.0 30.0 711320 Promoters of Performing Arts, Sports and Similar Events without Facilities 7.0 14.0 711410 Agents and Managers for Artists, Athletes, Entertainers and Other Public Figures 7.0 10.0 711510 Independent Artists, Writers, and Performers 7.0 5.0 712110 Museums 7.0 25.5 712120 Historical Sites 7.0 5.0 712130 Zoos and Botanical Gardens 7.0 25.5 712190 Nature Parks and Other Similar Institutions 7.0 5.0 713110 Amusement and Theme Parks 7.0 35.5 713120 Amusement Arcades 7.0 5.0 713210 Casinos (except Casino Hotels) 7.0 25.5 713290 Other Gambling Industries 7.0 30.0 713910 Golf Courses and Country Clubs 7.0 14.0 713920 Skiing Facilities 7.0 25.5 713930 Marinas 7.0 7.0 713940 Fitness and Recreational Sports Centers 7.0 7.0 713950 Bowling Centers 7.0 7.0 713990 All Other Amusement and Recreation Industries 7.0 5.0

    However, lowering small business size standards is not in the best interest of small businesses in the current economic environment. The U.S. economy was in recession from December 2007 to June 2009, the longest and deepest of any recessions since World War II. The economy lost more than eight million non-farm jobs during 2008-2009. In response, Congress passed and the President signed into law the American Recovery and Reinvestment Act of 2009 (Recovery Act) to promote economic recovery and to preserve and create jobs. Although the recession officially ended in June 2009, the unemployment rate is still high at 8.2 percent in June 2012 and is forecast to remain around this level at least through the end of 2012. More recently, Congress passed and the President signed the Small Business Jobs Act of 2010 (Jobs Act) to promote small business job creation. The Jobs Act puts more capital into the hands of entrepreneurs and small business owners; strengthens small businesses' ability to compete for contracts; includes recommendations from the President's Task Force on Federal Contracting Opportunities for Small Business; creates a better playing field for small businesses; promotes small business exporting, building on the President's National Export Initiative; expands training and counseling; and provides $12 billion in tax relief to help small businesses invest in their firms and create jobs.

    Reducing size standards based solely on analytical results would decrease the number of firms that could participate in Federal financial and procurement assistance for small businesses. That would run counter to what SBA and the Federal government are doing to help small businesses. Reducing size eligibility for Fed