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Franchise Eligibility Documentation: Per the New SOP 50 10 5 (f)

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October 31, 2013

KarenMcHugh101612By Karen McHugh
SBA Complete

SBA just recently released the newest version of the SOP 50 10 5 (F), effective January 1, 2014. Even though the new rules don’t become effective for another few months, now is the time to review, interpret, and commit it to memory. There is a lot to digest, so rather than providing a simple summary of the highlights, we’ve decided to outline one topic at a time. There is a “new” franchise eligibility clarification that we want to point out.

As you probably already know, franchise eligibility has much more to do with affiliation and size standards than it does franchise type. SBA has determined if the franchisor has “control” over the franchisee, then they could probably be considered affiliates of one another. Therefore, when performing the size standard eligibility analysis, the franchisor and franchisee’s financial information must be combined to determine if the applicant business i meets SBA size standards. The franchise agreement is acceptable if it does not impose unacceptable control provisions on the Small Business Applicant, which would result in affiliation. The fact that the agreement is acceptable does not mean that the Small Business Applicant is eligible; therefore, the lender must consider all other size, eligibility, and underwriting requirements specific to a respective loan applicant/application.

When the new SOP becomes effective, delegated lenders also have the option of submitting franchise agreement documentation to SBA for affiliation determination. In such case, the documentation must be sent to DelegatedFranchiseReviews@sba.gov. If SBA determines that the parties are not affiliated based on the agreement and any supplemental documentation, the lender may continue to process the application under its delegated authority.

The franchise agreement must be executed by all parties prior to first disbursement. If the application is submitted to the LGPC for standard processing, the lender must also submit a certification signed by the franchisor that it will provide the franchisee with any SBA addendum, which will supplement the Franchise Documents. If the lender disburses the proceeds without obtaining the necessary executed franchise documents, including any amendments and/or addendums, SBA may deny liability on its guaranty.

If the franchise is listed on the Franchise Registry

To facilitate the review of these agreements, SBA makes available a list of franchise agreements (the “Registry”) that have been approved for size/affiliation and control issues. This information is available at www.franchiseregistry.com. (SBA also posts a list of approved agreements by year on SBA’s website at www.sba.gov/for-­‐lenders.) However, the lender must ensure that they have the correct date of the agreement that the applicant/franchisee is operating under in order to access the correct Registry documents. SBA will accept the executed Certification of Franchise Documents (available on the Registry website) matching the correct year of the agreement as conclusive evidence that the franchisee is not affiliated with the franchisor based upon the agreement.

If the franchise is not listed on the Franchise Registry

A review must be made of the franchise agreement and all related documents to determine franchisor control over the franchisee.

Also, lenders should consult the SBA Franchise Findings List at http://www.sba.gov/content/franchise-­‐findings to see if there have been any findings for a particular franchise agreement, which if still in the agreement, would result in a determination of affiliation. Lenders should consult the “fix available” category on the findings list to see if there is a fix to remedy the specific issues noted on the findings list

Lastly, if a franchise agreement has no negotiated fix available and the noted findings remain in the agreement, then the agreement should be determined to result in affiliation and therefore, ineligible.

Lenders may contact SBA counsel in their SBA field office or the SBA Chief Franchise Counsel for specific questions regarding franchise affiliation determinations. Franchisors may contact the SBA Chief Franchise Counsel at franchiseappeals@sba.gov for questions regarding the franchise registry approval process. We assist in consulting and in outsourcing services. As it pertains to the new SOP changes, think of us as a resource to training and technical assistance. To learn more about the all-­‐inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-­‐801-­‐2378.

SBA Complete assists in consulting and in outsourcing services. As it pertains to the new SOP changes, think of us as a resource to training and technical assistance. To learn more about the all-­‐inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-­‐801-­‐2378.

 

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