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SBA 504 Q&A: Franchise Review Process

Jul 2018

Q: What are the key points regarding the current franchise review process for the Small Business Administration (SBA) 504 Loan Program?

A: Effective Jan. 1, 2018, 504 lending partners and Certified Development Companies (CDCs) no longer have to review franchise agreements for affiliation between the franchisor and franchisee or for eligibility of the franchise. Additionally, the SBA's Sacramento Loan Processing Center (SLPC) is no longer reviewing pre-application franchise documentation as the SBA has established a Franchise Directory.

If an applicant's brand meets the Federal Trade Commission's (FTC) definition of a franchise, it must be on the new Franchise Directory in order to obtain SBA financing.

What is listed on the Directory?

• Per SOP 50 10 5(J), any relationship that meets the FTC's definition of a franchise will be listed on the registry (see definition below*). This means that it will include listings for not only franchise agreements, but for license, jobber and dealer agreements as well.

- Note: In order to avoid confusion regarding brands that appear to be franchises, but that do NOT meet the FTC definition, the SBA will include such brands on the Directory at the franchisors request if they are eligible in all other aspects.

The directory will provide the necessary information to move forward with the financing request, which includes:

• SBA Franchise Identifier Code - this must be provided with the application when sent to the SBA.

• Whether an addendum is needed and, if so, whether the franchisor will use the SBA addendum to Franchise Agreement (SBA Form 2462) or an SBA negotiated addendum - which the franchisor should provide.

- With respect to the SBA negotiated addendum, the directory will list the most recently negotiated addendum, which will not be earlier than 2015.

• Whether there are additional issues the CDC must consider with respect to the brand; i.e. documentation that the business will be open to all, review of any management agreements, etc.

- Management agreements are still reviewed by the SLPC for eligibility and affiliation pre-application.

What if an applicant operates under multiple agreements or product lines?

• CDCs only need to check the Directory for the brands or agreements that are “critical” to the applicant's business operation.

- The SBA considers an agreement to be “critical” if the agreement (or the products, services or trademarks covered by it) account, individually or together with other agreements, for more than 50% of the applicants revenues. Meaning if the applicant operates under multiple brands that are critical to their operation, the CDC must check the Directory for those “critical” brands.

- If the applicant's agreements are not “critical,” the CDC does not need to check the Directory before processing the application.

What is the procedure to add brands to the Directory?

• The franchisor must submit the agreement, Franchise Disclosure Document (FDD), if applicable, all other documents the franchisor requires the franchisee to sign, and their contact information to franchise@sba.gov for an affiliation and eligibility determination.

- If the franchisor agrees to use SBA Form 2462, the SBA will only conduct an eligibility review, not affiliation, and this will speed up the approval process.

- If the franchisor elects not to use SBA Form 2462, the SBA will work with the franchisor to resolve any affiliation issues, which could include use of an SBA negotiated addendum. When this option is elected, the applications will be reviewed in the order in which they were received.

- After review, and finalization of any needed addendums, the SBA will list the brand on the Directory along with applicable information.

While all of this has made the franchise review process easier, the CDC must still obtain an executed copy of the franchise agreement, and all applicable documents, along with the appropriate addendum and provide the same to the SBA, via a 327 requesting concurrence, prior to submitting the loan for debenture funding.

*Federal Trade Commission's definition of Franchise: any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller (Franchisor) promises or represents, orally or in writing, that:

• The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell or distribute goods, services or commodities that are identified or associated with the franchisor's trademark;

• The franchisor will exert or has authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation; and

• As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

Access the SBA Franchise Directory here.

If you have a question you'd like our SBA 504 loan experts to answer, email us at info@ffcfc.com or call 850.681.3601 or toll-free at 800.504.LOAN.