Mark Pestronk
Q: A prospective corporate account has asked us if we qualify as a small business. Apparently, the corporation has a government contract or grant that requires the company to subcontract to small businesses if possible or to give preferences to small businesses. How do we tell if we qualify as a small business? Exactly how small do we have to be?
A: The U.S. Small Business Administration (SBA) sets size limits for each kind of business. For most service businesses, the limit is expressed in terms of "receipts," which in the case of travel agencies is defined to exclude money collected but remitted to travel suppliers.
In other words, receipts for travel agencies consist only of commissions, overrides, any other kind of payment from suppliers, markups, fees and GDS incentives. In accounting terminology, it is the same as sales minus cost of sales or gross income.
The SBA's size limit for travel agencies is $21.5 million. This is measured by the annual average for the last three fiscal years.
In measuring receipts, the SBA includes the revenue of any affiliated companies. By "affiliated," I mean under the same majority ownership. I don't mean franchisors or host agencies.
I imagine most readers would probably agree that $21.5 million in commissions and fees (as an annual average for the last three years) is not only not small but in fact is rather huge. Assuming that the average corporate agency's commissions and fees are about 5% or 6% of sales and that the average leisure agency's commissions and fees are about 8% to 12% of sales, then the size limit of $21.5 million in receipts would mean between $180 million and $430 million in total sales.
On Travel Weekly's 2016 Power List, only the 30 largest agencies have sales of more than $400 million, and most of those agencies are corporate-oriented. So assuming that there are about 13,000 ARC-accredited agencies, which is the most recent number I can find in Travel Weekly, then 12,970 would be deemed small by the SBA.
The $21.5 million limit set by the SBA was obviously a mistake and ought to be lowered. The government probably included the top internet giants like Expedia and Priceline, which are barely in the same business as the typical retail travel agency.
Incidentally, the same dollar limit applies to small businesses owned by women, minorities or disabled veterans.
When you perform travel services for a corporation or institution that has small-business subcontracting obligations under its government contract, you are allowed to certify yourself as small. There is no need to obtain any government or private certifying agency's approval or the like.
If the corporation's procurement official asks for more specifics, just say that your company "qualifies as a small business because your average annual receipts for the last three fiscal years were less than $21.5 million, as required by the SBA's standard for NAICS 561510." The acronym and the number refer to the travel agency category in SBA-speak.
Some small businesses strongly believe that the current limit is much too high and are asking the SBA to lower it, as I will discuss in a future column.