Changes in SOP 50 10 5(B) Franchise Review Rules

SBA makes some notable additions and changes to the rules governing review of Franchise/License/ Dealer/Jobber or Similar Agreements in SOP 50 10 5 (B) effective October 1, 2009:

1. SBA adds a strong reminder to lenders that just because the agreement is eligible, there could be other reasons the applicant is not eligible. There is a warning on the Franchise Registry site that also advises lenders that even if a franchise is listed they "must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, conflicts of interest, creditworthiness, use of proceeds, and discrimination." Be aware that even franchises listed on the Registry may not be eligible for other reasons. For example, Sola Salons is listed, however the applicant may not be eligible because over 50% of their income may come from rental of space, not provision of services.

2. Franchise development agreements which provide the developer a geographic area in which they are expected to find locations and potential franchisees to operate at those locations, and where the developer's income is derived from the royalty payments of each franchise unit they develop in that territory, are not eligible. SBA considers them to be inherently speculative businesses and passive investments. If the franchisee's income is derived from its ownership and operation of a franchise business or several franchise businesses in the territory, it is not speculative or passive. Therefore, an agreement that allows a franchisee to own and operate a number of franchises within a specific territory may be eligible if the rest of the rules are met.

3. SBA has changed it's policy and no longer finds it acceptable for the franchisor to require the franchisee to sell their real property to franchisor upon expiration or breach of the agreement. This used to be allowed if the sale was for fair market value based on an objective appraisal. SBA now considers this to be too much control by franchisor and unacceptable interference with the owner's right to profit since he cannot determine the disposition or future use of his real property after the agreement is terminated. Options to take over leases, or purchase personal property used in the business, are still acceptable if they comply with the rest of the rules.

4. If the franchisor's consent to transfer is required, the agreement must expressly state that consent to transfer will not be unreasonably withheld or delayed, or its equivalent. SBA will not infer this statement into any agreement based on the context of the agreement, other statements of reasonableness in a UFOC, FDD or other document, state law, or any other basis.

5. In the case of gas station loans, deed restrictions pertaining to the use of the property intended to protect the health and safety of the occupants may be acceptable.

6. Lenders that believe a franchise decision rendered by SBA is inconsistent with the SOP may appeal the decision to the SBA Franchise Committee by sending a copy of the decision and the reasons why the lender finds it inconsistent with the SOP to FranchiseAppeals@sba.gov.