Changes in SBA Policy Will Affect Thousands of Franchisors

November 11th, 2016 by Nancy Chen

UPDATE

Last week at the national SBA lender conference, SBA senior staff announced that the long-awaited changes to the franchise affiliation process are about to be issued through the release of a new SOP (Standard Operating Procedure) which will be effective January 1, 2017 at the earliest.  It is not clear if the election results will impact this decision or further delay the release of the SOP.   SBA indicated the SOP will include a one-page addendum that addresses all franchise affiliation requirements.  The existing rule are in effect until then.

When asked whether franchisors will be able to request modifications to the addendum to meet the requirements of a particular franchisor or industry, SBA said no, if franchisors choose not to sign their franchisees won’t have access to SBA guaranteed financing. SBA further elaborated that this will be a legal document between the franchisor and the franchisee, and the franchisee will have recourse if the franchisor violates the addendum. Since the addendum has not yet been released, we are unable to say whether this language will work for franchisors or what the FTC might have to say about it. To our knowledge, they were not asked for input. Further, we cannot comment on whether there is recourse by lenders if there is a franchisor violation.

For over 50 years, the franchise community has strongly resisted standard franchise agreement language because of the many different approaches to the franchise business model that lead to different contract terms across brands.

From the very beginning of SBA’s consideration of a standard addendum, the franchising community has asked that franchisors be given an option of negotiating a custom addendum if they have issues with any proposed standard addendum.  In excess of 2,000 franchisors have such agreements in place with SBA now, thereby making such a choice a simple alternative.  It remains to be determined whether SBA will allow franchisors the choice of keeping in place what already has been approved.

SBA/Franchise Background

Since 1998 SBA has been willing to negotiate specific language alternatives and have them apply nationally. This will no longer be allowed, even though many in the franchise community encouraged SBA to at least grandfather in the existing negotiated SBA addendums. Now all franchisors, whether or not they have had affiliation issues in their documents and negotiated solutions, will be required to sign the standardized addendum for each franchisee SBA loan.

SBA’s goal in making the change is to simplify the process so that lenders can finance franchisees faster while minimizing the resources required for SBA to meet the regulatory requirements of financing only small businesses. SBA seems to have addressed lender and SBA issues over a process that has become challenging for some. All stakeholders recognize the existing process needs to be improved, but the franchise community needs to make sure that there aren’t large scale negative impacts as a result of the change.

Implications to Franchising

Clearly, SBA will reduce their workload with this “sign-or-don’t-get-SBA-guaranteed-financing” approach. There appears to be no designated SBA office with which to address concerns once in effect January 1, 2017. SBA further elaborated that many broader affiliation issues that have been problematic, such as gender-specific franchise businesses, and universal credit issues, such as option-to-lease documents, subordination documents and the like, will no longer get support.

What this means to you

These changes will lead to:

  • Franchisors having to negotiate with each lender on these issues,
  • Putting the burden of SBA affiliation and credit-related SOP issues on franchisors and lenders to solve loan by loan, which is the way it existed before 1998.

Fortunately, senior SBA staff indicated that the SOP is a flexible document. The implication was that they are exploring how far they can push the envelope with the goal of streamlining and standardization. They realize that there could be substantial negative feedback and therefore say during the next 60 days are open to understand the issues that arise as a result of this SOP change.

Next Steps

We at FRANdata are reaching out to attorneys across all industries to gain a better understanding of the impact and the appropriate response to SBA’s change, once the addendum itself is known. We will also be consulting with the IFA to determine how best to respond on behalf of the entire franchise community.

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