The Code of Federal Regulations indicates that "concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.  It does not matter whether control is exercised, so long as the power to control exists."  See 13 CFR § 121.103.  In reviewing franchise/ license/dealer/jobber agreements that are not listed on the Franchise Registry, lenders must confirm whether any such agreement allows the borrower the right to profit from its efforts and bear the risk of loss commensurate with ownership.  Id.  Affiliation based on franchise/ license/dealer/jobber agreements is inherently subjective, which poses a dilemma for lenders in processing franchise transactions.  Although PLP lenders may obtain SBA's assistance with franchise affiliation reviews through the delegated review mailbox, many lenders will conduct the analysis without SBA's review.  This article will discuss a few uncommon control provisions found in franchise/license/dealer/jobber agreements, which may lead to a finding of affiliation.

• Pricing: Provisions in the franchise agreement that allow the franchisor to control prices through maximum and minimum price limits are typically ineligible. SBA deems such provisions to interfere with the borrower's ability to profit from its enterprise, unless such limits are applied consistently to all franchisees within the franchise system, or comply with a bona fide regional or national marketing program.
• First Right of Purchase/First Purchase Option:  Agreements which permit the franchisor to purchase the borrower's business at any time, prior to the borrower receiving third party offers, are deemed to be ineligible.  These provisions differ from a right of first refusal where the borrower obtains an offer from a bona fide third party, which the franchisor then matches.
• Subordination/Postponement of Purchase Price upon Sale/Transfer:  Upon a sale or transfer of the business, if the borrower's right to payment under an installment note is subordinate to franchisor's right to monies owed under the franchise agreement, such provisions indicate excessive control and interfere with the borrower's ability to profit from its enterprise.  Similarly, if the franchisor requires that the borrower's purchase price is paid over time rather than at the time of the sale and transfer, then such provisions would render the agreement ineligible.
• Determining Franchisee Incapacity:  Provisions in an agreement that permit franchisors to solely determine whether or not a franchisee is incapacitated are ineligible, as such requirements effectively deprive the borrower of the ability to operate and profit from its business.
• Security Interests:  Oftentimes, franchisors will require that the franchisee refrain from placing any liens on the franchised business assets for the duration of the agreement, or that the existence of any liens on the business assets (which are not promptly discharged) may be an event of default. Such provisions often conflict with the lender's loan requirements in obtaining a first lien on the borrower's business assets.
• Continuing Guaranty:  Agreements that require the borrower to guaranty the transferee's obligations under the franchise agreement post-sale are ineligible and deprive the borrower of the ability to profit from its business. 

Lenders must carefully review all documents, which may be subject to a franchise affiliation analysis.  If the agreements allow the franchisor to have excessive control over the applicant's business, pursuant to SBA's guidelines, then the lender must address such provisions and fix the agreement prior to closing the loan.  Failure to identify or address all potential control issues may result in an ineligible loan and denial of the guaranty.

For assistance with franchise affiliation reviews, please contact Jen at jborra@starfieldsmith.com or at 267-470-1206.