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Potential Franchisees must be up to date on the latest SBA requirements placed on any and all franchise models. The SBA has simplified the previously a la carte practice of negotiating and customizing individual franchise agreements before qualifying a loan.
If the selected franchise is not currently listed on the Franchise Registry, it may be because of the requirement to sign the new 2017 Addendum to the SBA Standard Operating Procedures. This could be a heads up that jeopardizes the franchisees ability to get financial support from the SBA. The SBA historically engaged the Franchise Registry to assist in vetting franchise operations. Varied franchise model and affiliate relationships were evaluated. Issues could range from whether the brand was truly defined as a franchise or what levels of control the Franchisor could effect. Now the only concern is whether they complied with previous SBA addenda and whether they will sign the new SBA addendum. Franchisors who want to continue to be represented in the registry must update their profile to concur with all SBA franchise SOP changes. They must make sure their FDD statement us up to date with the new 2017 regulations.
The restraints imposed on a franchisee generally will not be considered in determining whether the franchisor is affiliated with the franchisee applicant. The new addendum must be signed by the Franchisor and Franchisee. Each must attest that the Franchisee is applying for an SBA loan and that their signatures would be mandatory. The parties each agree that if there is a change of ownership or if the Franchisor has a first right of refusal, the transfer cannot involve a family member as current franchisee. In the event of a transfer in whole or in part, the initial Franchisee will not be liable for the actions of the receiving transferee. If there is a disagreement in the value of the franchise, an approved appraiser will be used. If the franchisee owns the real estate where the franchise is located, the Franchisee will not be required to sell the real estate. They may be required to rent to the new Franchisee until the franchise current term has ended. As well, the Franchisor cannot encumber real estate owned by the Franchisee with restrictive covenants, branding or environmental issues. The Franchisor cannot control the hiring or firing of Franchisee employees. Many Franchisors were not allow to become a part of the Franchise Registry because of overbearing control. Some previously approved franchises lost their standing on the registry. With this new addendum, the agreement terminates as soon as the SBA loan is paid.
The restraints imposed on a franchisee or licensee by its franchise or license agreement relating to standardized quality, advertising, accounting format and other similar provisions, generally will not be considered in determining whether the franchisor or licensor is affiliated with the franchisee or licensee provided the franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. Affiliation may arise, however, through other means, such as common ownership, common management or excessive restrictions upon the sale of the franchise interest. This is a one size fits all addendum!
So what does that mean for lenders who are extending SBA loans to franchisees? As of January 1, 2017, SBA will no longer evaluate franchise agreements. The process will be streamlined. This new SBA Addendum MUST be signed by both the franchisor and franchisee in order for the loan to be eligible for SBA financing. Moreover, SBA will not accept any alterations to the SBA Addendum. The new rules will continue the Franchise Registry as a clearing house to identify franchise systems, confirm credit and lending standards, obtain educational updates, and explain required documentation. Lenders will have access to this brand tracking repository in a similar fashion as the DUNS system provided by Dun and Bradstreet.
Franchisees seeking loans should get upfront clarification on these new requirements. Too many potential entrepreneurs get too far into vetting process before they get familiar with the lending process.
- If both the franchisor and franchisee sign the SBA Addendum, SBA will not deem the
- Lenders must review all additional franchise documentation (beyond the Franchise.