July 11, 2013
Sometimes PLP lenders may choose to shy away from a franchised operation if they are not listed on SBA’s franchise registry (www.franchiseregistry.com), because they don’t want to jump through the hoops required to make the eligibility decision delegated to them. However, even if the franchisor is not listed on the registry, there are places to go for direction and help when interpreting SBA’s requirements and determining franchise eligibility:
• Focus on SOP 50 10 (5) E pages 94 – 102. The primary concern of SBA is that the applicant (the franchisee) must meet the size standards; therefore, it is necessary for the lender to determine whether the franchisor and the franchisee are affiliated. If they are, the chances are good that the franchisee (borrower) would not be defined as a “small” business, and, therefore, ineligible. SBA delegates eligibility determination authority to PLP and SBA Express lenders; however, the lender may pose questions directly to SBA at firstname.lastname@example.org.
• Take a look at SOP 70 50, Appendix E. This SOP is a guide to SBA legal counsel and provides
good insight into what limitations are imposed on franchise agreement language by SBA.
• Base SOP interpretations on 13 CFR 121.103(g). Again, determination of affiliation is the primary focus of the actual regulation, which states that the franchisee must have the right to profit from its efforts and bears the risk of loss commensurate with ownership of the business. SBA is rightly concerned that the franchisor does not exert undue control on the franchisee to the point where fundamental eligibility could be a question based on possible affiliation and size.
• Use the franchisor Uniform Offering Circular and the franchise agreement to determine the relationship between the franchisor and the franchisee. The SOP 50 10 applies the same requirements imposed on franchise agreements to license agreements, dealer agreements, jobber and similar agreements. Research and appropriate interpretation of the rules is an important first step. This must be followed by thorough documentation in the loan file to support the decision.
Many lenders like these types of deals because they lend themselves well to a systematized, consistent approach by the borrower. Prudent policies and procedures account for the approach and the steps required to manage this lending niche profitably and soundly.