Can we continue the contract with the new firm? can we exercise the option(s) ?
From the guidance found at Federal Acquisition Regulation (FAR) 19.301-2 Rerepresentation by a Contractor That Represented Itself as a Small Business Concern:
“… (b) A contractor that represented itself as a small business concern before contract award must rerepresent its size status for the North American Industry Classification System (NAICS) code in the contract upon the occurrence of any of the following:
(1) Within 30 days after execution of a novation agreement or within 30 days after modification of the contract to include the clause at 52.219-28, Post-Award Small Business Program Rerepresentation, if the novation agreement was executed prior to inclusion of this clause in the contract.
(2) Within 30 days after a merger or acquisition of the contractor that does not require novation or within 30 days after modification of the contract to include the clause at 52.219-28, Post-Award Small Business Program Rerepresentation, if the merger or acquisition occurred prior to inclusion of this clause in the contract.
(3) For long-term contracts—
(i) Within 60 to 120 days prior to the end of the fifth year of the contract; and
(ii) Within 60 to 120 days prior to the date specified in the contract for exercising any option thereafter.”
“(c) A contractor must rerepresent its size status in accordance with the size standard in effect at the time of its rerepresentation that corresponds to the NAICS code that was initially assigned to the contract.”
“(d) After a contractor rerepresents that it is other than small in accordance with 52.219-28, the agency may no longer include the value of options exercised, modifications issued, orders issued, or purchases made under blanket purchase agreements on that contract in its small business prime contracting goal achievements. Agencies should issue a modification to the contract capturing the rerepresentation and report it to FPDS within 30 days after notification of the rerepresentation.”
“(e) A change in size status does not change the terms and conditions of the contract.”
The parts that are bolded above apply to your situation. Key points are that the Contractor must recertify but as a large business now. Your buying activity may no longer include the option dollars that apply in accordance with paragraph (d) above. And most importantly, paragraph (e) above states clearly that “a change in size status does not change the terms and conditions of the contract.” You may exercise the options, after fully complying with FAR requirements for exercising options, but you may not include the value of those options in your small business goals achievement.