Many franchisors have experience with the U.S. Small Business Association (“SBA”) as numerous franchisees utilize the SBA’s loan programs for small businesses. Previously, franchisors could send an application to the SBA to get on the Franchise Registry. During this process, the SBA reviewed the franchise agreement and drafted an addendum to revise the franchise agreement to avoid inclusion under the SBA’s “affiliation” rule (“SBA Negotiated Addendum”). This process was time-consuming and costly to all parties involved.

On November 22, 2016, the SBA issued an information notice to streamline the process for loan programs for franchised businesses (“Information Notice.”) The Information Notice became effective January 1, 2017. First, the SBA announced a revision to the principles of affiliation with respect to franchise programs. The SBA now focuses on whether the franchisee “has the right to profit from its efforts and bears the risk of loss commensurate with ownership.” 13 CFR 121.301(f)(5). This is the key factor in ensuring that the franchisee maintains its eligibility status as a “small business” .

Copyright: belchonock / 123RF Stock Photo
Copyright: belchonock / 123RF Stock Photo

In the Information Notice, the SBA stated that it would no longer review franchise agreements. Instead, the parties falling under the definition of a “franchise” (under the FTC Rule on Franchising) would be required to execute the new standard addendum (“SBA Standard Addendum”). Further, the SBA removed the Franchise Registry and SBA Franchise Findings List.

On February 14, 2017, the SBA issued a new policy notice outlining temporary changes to the new process for loans to franchisees (“Policy Notice”). Specifically, if a franchisor developed a SBA Negotiated Addendum with the SBA during 2015 or 2016, the franchisor can continue using that form of SBA Negotiated Addendum instead of the new SBA Standard Addendum. With that, the franchisor also has to sign the required form of certification (“Certification”), which is attached to the Policy Notice. The Certification certifies, among other things, that the SBA previously approved its SBA Negotiated Addendum and determined that the franchise relationship did not create an affiliate relationship. It also certifies that the franchisor has not revised the franchise agreement with respect to the terms that relate to affiliation.

Many franchisees utilize the SBA loan programs and it is important for franchisors and their legal counsel to be well-versed in this process to expedite the loan process . The Policy Notice expires on February 1, 2018, so franchisors must review and revise their process for franchisees seeking SBA loans.