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Primary purpose of Franchise revisions is to streamline procedures for determining
size eligibility based on affiliation between Franchisee & Franchisor
• Regulatory Changes – 13 CFR §121.301(f)(5) (effective July 2016)
• Affiliation based on franchise and license agreements.
• The restraints imposed on a franchisee or licensee by its franchise or
license agreement generally will not be considered in determining
whether the franchisor or licensor is affiliated with an applicant franchisee
or licensee provided the applicant franchisee or licensee has the right to
profit from its efforts and bears the risk of loss commensurate with
ownership. SBA will only consider the franchise or license agreements
of the applicant concern.
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New procedures apply to all SBA applications on or after 1/1/2017, per SOP 50 10 5(I)
• “Franchise and License Agreements”
• SOP 50 10 5(I), page 228
• SBA Policy Notice 5000-1941, effective February 14, 2017
• Apply to agreements/relationships:
• Small Business Applicant ONLY – not affiliates
• Projects that meet Federal Trade Commission (FTC) Franchise definition
in 16 CFR§436
• Covered by Petroleum Marketing Practices Act (PMPA) – e.g., gas stations
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New Franchise Review Guidance
• NEW – SBA has eliminated the need for SBA to:
1. Review franchise and license agreements to determine affiliation between
franchisor and franchisee
2. Maintain an internal or external centralized listing of franchise systems where the
franchisor and franchisee are not considered affiliated
3. Maintain an internal or external centralized listing of “franchise findings”
4. Utilize the Franchise Registry or FRUNS numbering system
• NO CHANGE – To be eligible for SBA financing, Applicant must:
1. Be independently owned/operated, small, and not dominant in its field
2. Have right to profit from its efforts and bear risk of loss commensurate with
Ownership
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Franchise means any continuing commercial relationship or arrangement, whatever it
may be called, in which terms of offer or contract specify, or franchise seller promises
or represents, orally or in writing, that:
a. Franchise 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;
b. 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
c. 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.
Agreement/Relationship must meet all three elements of the franchise definition to be
deemed a franchise.
Agreement/Relationship CAN meet FTC franchise definition even if not called
“franchise”
-- e.g. Best Western = “membership agreement”
The first element of a defined Franchise relationship is characterized by the
use of the “Franchisor’s” trademark, even if the trademark is not registered.
According to FTC guidance, the term “trademark” is intended to be read
broadly to cover not only trademarks, but any service mark, trade name, or
other advertising or commercial symbol.
Note, the definition says the franchisee has “the right” to operate a business
that is “identified or associated with” the franchisor’s mark; it doesn’t have
to actually be used. Also, if the franchisee is specifically prohibited from
using the mark, then the arrangement does not meet the FTC definition.
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The second element defining a Franchise relationship is the issue of control.
Again, according to the FTC, in order to be deemed “significant,” the control or
assistance must relate to the franchisee’s overall method of operation – not a small part
of the franchisee’s business. Control or assistance involving the sale of a specific
product that has, at most, a marginal effect on a franchisee’s method of operating the
overall business will not be considered in determining whether control or assistance is
‘significant.’”
Examples of control that may be deemed “significant” include: site or location approval;
specification of site design or appearance requirements; specified hours of operation;
specified production techniques; and mandated accounting practices. On the other
hand, promotional activities without additional forms of assistance, generally will not be
deemed “significant.”
For additional examples of what activities the FTC may consider “significant,” see the FTC
Franchise Rule Compliance Guide at https://www.ftc.gov/system/files/documents/plain-
language/bus70-franchise-rule-compliance-guide.pdf.
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The third element to the FTC definition is payment to the franchisor or its affiliate of at least $500 any time
prior to or within the first six months of the commencement of operations of the franchised business.
According to FTC guidance, the term “payment” is “intended to be read broadly, capturing all sources of
revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor,
market its goods or services, and begin operation of the business.” (FTC Franchise Rule Compliance Guide,
pg. 5.)
Examples of required payments include: initial franchise fee; rent; advertising assistance; equipment and
supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a
result of the purchase); training; security deposits; escrow deposits; non-refundable bookkeeping charges;
promotional literature; equipment rental; and continuing royalties on sales. The term does not include,
however, payments made for reasonable amounts of inventory at bona fide wholesale prices for resale or
lease to the public.
Every payment that is made, no matter what it purports to be for or what it is called, is subject to being
classified as a “franchise fee.” Therefore, the CDC should carefully analyze each payment that the Borrower
expects to pay or has paid to the “Franchisor” in determining whether any of the payments are considered a
franchise fee under the third element of the definition.
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Guidance for Applicants with Multiple Agreements at one location
(e.g., Independent insurance agents, Independent tire retail stores, etc.):
1. Review agreements – do any meet the FTC definition of franchise?
2. How much of the applicant’s revenue do the agreements meeting the FTC
definition of franchise constitute?
3. Determine whether any agreement/relationship which meets the FTC
definition of “franchise” constitutes a critical portion of applicant’s revenue
4. For any agreement deemed “critical,” CDC must obtain all Required
Documentation and follow Franchise Review Process.
CDCs must continue to ensure that all aspects of the project are eligible business
types, despite the percentage of revenue they generate.
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1. Copy of Franchise Agreement
2. SBA Addendum to Franchise Agreement (SBA Form 2462)
ORTemporary Alternative Documentation: Certification (SBA Form 2463) and SBA
Negotiated Addendum (ONLY available when SBA and Franchisor have previously
negotiated addendum specific to 2015 or 2016 franchise agreements)
o Addendum/Temporary Alternative Documentation overrides franchise agreement
provisions in conflict with SBA requirements
o Only addresses “affiliation” between Franchisor and Franchisee
o No alterations allowed to SBA Form 2462, SBA Form 2463, or an SBA
Negotiated Addendum
3. Any related documents of which the franchisor requires the franchisee to sign or
acknowledge receipt (For example: Purchase Option Agreements, SNDAs, Lease
Option Agreements, Covenants and Deed Restrictions, and Right of First Refusal
documents)
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Form now includes
option to allow the entity
to select the appropriate
type of agreement and
the proper titles of the
parties to the agreement.
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• NO CHANGE – CDC is still responsible for reviewing
agreement(s) to ensure applicant meets all SBA eligibility
requirements
▪ Franchisee is an eligible business type
• e.g., Not passive business, no restrictions on patronage
▪ Specific prohibited collateral restrictions
• e.g., No deed restrictions in Purchase Contract, restrictions in
Dealer Agreements
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1. CDC determines whether applicant is a franchise/meets FTC definition of
Franchise
2. CDC reviews agreement(s) and all related franchise documents for Eligibility
Issues
3. CDC obtains Addendum to Franchise Agreement (or Temporary Alternative
documentation, if applicable)
4. Pre‐Application Review Request to SLPC via e504
• Include all Required Documentation, whether executed or not
5. SBA reviews documentation and, if all franchise documentation is approved,
SBA issues franchise approval/clearance* to CDC
*Disclaimer – Issuance of franchise clearance does not constitute loan approval
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6. CDC submits 504 Loan Application
• Include franchise clearance from Pre-App Review in Exhibit 13 (Form 1244)
7. SLPC reviews application. If approved, provides Loan Authorization
• When all Required Franchise Docs are executed – SLPC sends approval notification to CDC
• When all Required Franchise Docs are NOT executed – SLPC inserts Franchise Doc requirement
language in the Authorization
• PCLP – CDC manually inserts language in Authorization
8. 327 Action prior to 504 loan closing
• Required if documentation is not executed at Pre‐Application Review step
• All executed documentation submitted to SLPC via 327 Amendment
• 327 Amendment approval meets franchise condition of Authorization
CDC must obtain executed Franchise Agreement(s) and Addendum(s) BEFORE Interim
Loan is funded, in order to protect Interim Lender.
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Q2: Are Addendums loan‐specific? Should CDC add loan number to Addendum?
No. The Addendum is valid for the life of the specific Franchise Agreement and can be
used for multiple loans to that applicant.
Q3: If the franchisor signs an Addendum and there is another 504 franchise loan
with the same borrower, can they use same addendum?
• Yes. However, if there are multiple locations of the franchise, each location’s application must have
an Addendum provided with the application.
• If they are operating under the same Franchise Agreement, they only need one addendum.
• If each location utilizes a different franchise agreement, you must have the specific addendum
for that version of the franchise agreement for which they are obtaining a loan.
The CDC should ask if there is more than one version of this franchise concept and how/why it varies.
Q4: What does SBA review the agreement for during the Pre-App Review?
• SBA reviews the agreement for eligibility purposes and to confirm that the SBA Addendum (or Temporary
Alternative Documentation) is included. Further review may be required if SLPC has further questions
resulting from info in CDC credit memo at time of full loan application.
Q5: May I submit my loan application to SLPC without submitting a Pre-App Review?
• No. SLPC will screen out any loan application identified as a franchise (or other agreement that meets
the FTC definition of franchise) that has not been cleared through a Pre-Application Review.
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Q6: What is the process for a new franchise concept that does not have a Franchise
Identification number?
SLPC requests issuance of a Franchise Identification Number from the Office of Financial
Assistance if a franchise is new or does not have a Franchise Identification Number.
SLPC will need the Franchise Disclosure Document (FDD) pages sufficient to provide
these answers:
a) Legal name of franchisor
b) Trade name or d/b/a of franchise system
c) “Issuance Date” of the specific/current FDD
d) State of Organization for the Franchisor
For Dealer/Fuel or jobber agreements that do not issue an FDD, provide all documentation
of which the licensor/dealer is required to execute or acknowledge receipt, so SBA can
determine if it meets the FTC legal definition of a franchise.
Q7: Do the franchise review procedures apply to gas stations and Fuel
Distribution/Dealer/Jobber/License Agreements?
Yes. All agreements and relationships that are covered by the Petroleum Marketing Practices Act (PMPA),
15 U.S.C. 2801 (e.g., gas stations), are included within the FTC definition of “franchise” and are subject to
the new franchise procedures in SOP 50 10 5 (I) and Policy Notice 5000-1491 (effective 2/14/17), including
but not limited to requiring the SBA Addendum to Franchise Agreement (SBA Form 2462) or Temporary
Alternative Documentation.
A related issue to fuel agreements arises when the gas station includes a convenience store. If the
convenience store is covered under the same agreement as the fuel sales, then only one Addendum will be
required. If, however, there is a separate agreement covering the convenience store (or any additional
franchise operation inside the convenience store), then a separate Addendum will need to be obtained for
the fuel agreement and the agreement that governs the convenience store (and any other franchise inside
the c-store) if they meet the FTC definition of Franchise.
In all cases, if there are other documents the distributor/licensor/dealer requires the small business applicant
to sign, the CDC must review those documents to ensure compliance with all SBA Loan Program
Requirements.”
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Q8: What about Non-Fuel Dealer/Distribution/Jobber/License Agreements?
For distributor/license/dealer/other agreements and relationships that don’t involve the sale of fuel, the CDC
will have to review the agreement and any other documents the small business applicant is required to sign
in order to determine if the agreement meets the FTC definition of a franchise. The agreement or
relationship must meet all three elements in order to be deemed a “franchise”; if the agreement or
relationship does not meet all three elements of the definition, then it is not a franchise and is not subject to
the new procedures.
Q9: Are Area Development Agreements eligible?
Area Development Agreements MAY be eligible. These agreements allow a specific franchisee to operate a
number of franchises within a specified geographic area. They are not eligible if agreement allows the
developer to use outside franchisees to open locations in their territory. (See guidance in franchise section of
SOP 50 10 5(I), page 228 – type of business, restrictions, etc.)
Franchise Development Agreements – aka Master Franchise Agreements are INELIGIBLE. These
agreements are considered passive investments and/or inherently speculative. The Agreements provide
geographic territory to grow more franchise units and developer’s income consists of royalty payments from
independently owned franchise units.
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Q10: What if a Franchisor refuses to sign the SBA Addendum to Franchise Agreement
(SBA Form 2462) or temporary alternative documentation?
If the agreement meets the FTC definition of a franchise and the Franchisor refuses to execute the SBA
Addendum to Franchise Agreement (SBA Form 2462) or the Certification (SBA Form 2463) with SBA
Negotiated Addendum, the loan is ineligible.
Further, if the CDC fails to obtain the executed Addendum to Franchise Agreement prior to closing, the 504
loan may not be closed or funded.
If the Franchisor refuses to sign the SBA Addendum because they do not want to forgo their Right of
First Refusal (ROFR): The Addendum does not prevent the franchisor from having the Right of First
Refusal (ROFR). By signing, they agree only that they will only exercise such an option if the proposed
transferee is not a current owner or family member of a current owner of the Franchisee. This means if two
owners own a franchise and one owner wants to sell his/her shares to the other owner, the Franchisor will
not exercise their ROFR to transfer complete ownership to the franchisor. The same conditions apply to
transfers of ownership to family members of the owners, such as father to son, etc.
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Q11: What language is required in the loan Authorization?
SBA recognizes sometimes an addendum may not be executed prior to SBA’s loan approval. In those cases
SBA allows a CDC to submit the loan application without the executed addendum, provided the executed
documents are obtained prior to closing a 504 loan.
The updated language must be manually inserted into the Authorization Boilerplate. For CDCs the SLPC will
insert the following language in the 504 Debenture Authorization:
“Franchise - CDC must obtain the executed Franchise Agreement, either (i) the SBA Addendum to
Franchise Agreement (SBA From 2462), or (ii) the Certification (SBA Form 2463) and SBA Negotiated
Addendum, and all other documents the franchisor requires the franchisee to sign.”
PCLP CDCs will have to insert the language in the Debenture Authorizations themselves. The language can
be manually inserted into the “prior to closing” section of the 504 Authorization Boilerplate by clicking “Edit”
and adding the language above.
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