U.S. Small Business Administration Suggests Rule Changes for Franchisor Affiliates

The U.S. Small Business Administration ("SBA"), in response to pressure by the International Franchise Association, recently changed its position regarding how it views franchise companies and their affiliates for purposes of determining loan worthiness. I quote from the SBA's press release below:

One of the more challenging components of SBA’s franchise affiliation determinations relates to affiliated entities.  In the first of what is expected to be several Proposed Rule changes, SBA has listened to the concerns of franchisors as well as lenders, both of whom were aligned on this particular issue.

 In 2014, SBA began applying affiliation tests not only to the franchise agreement associated with an SBA loan but also to any other franchise agreements that the borrowing entity might have had with other brands.  All borrower agreements were being reviewed even though the requested loan proceeds were not being used for any other brands. 

The IFA, with support from FRANdata, acted quickly to ensure that franchisors and their own comments became known so that the SBA knew the negative consequences of this interpretation.  When SBA released a notice for public comment in late 2014, both the IFA and FRANdata sought to have as many franchisors as possible respond to this request.  The response was swift and the result is that SBA has released a Proposed Rulemaking where such unrelated franchise agreements would no longer be considered for purposes of affiliation. 

 "The goal was to ensure that the industry's voice was heard by the US Small Business Administration, and that any planned change be made to the benefit of the franchise community – we are very happy to see that the current proposed rule looks to have the desired outcome we have been looking for" says Edith Wiseman, President of FRANdata, "much kudos needs to be given to the IFA for all the effort and care they have given to this issue." 

The SBA plays an important role in the franchising industry. The SBA guarantees loans made by private lenders to qualified franchisees. Typically, the SBA is willing to guarantee a loan if the franchisor has met certain qualification requirements, which include having certain provisions and protections included in the franchise agreement. The SBA tracks these qualified franchisors through the Franchise Registry, which is operated by FRANdata.

You can read more about the SBA's proposed rule here.

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