SBA Further Streamlines Recently Enacted Franchise Review Process

Yesterday (February 14, 2017), the SBA issued SBA Policy Notice 5000-1941, which temporarily changes the franchise review process for 7(a) and 504 loans.

You may recall that new procedures were established effective January 1, 2017 related to satisfying the concerns of “affiliation” when a loan involves a franchise. This new policy allows for an alternative means to the use of the new universal franchise addendum and noted a number of other changes to policy.

• If the franchisor does not wish to execute the universal addendum, it can, instead execute a certification as prescribed by the SBA (SBA Form 2463) and sign its previously negotiated SBA Addendum (related to either a 2015 or 2016 version of a franchise agreement). The certification confirms that the SBA has previously reviewed the franchisor’s 2015 or 2016 franchise agreement including the negotiated SBA Addendum and found that affiliation did not exist. The franchisor also certifies that their its 2015 or 2016 franchise agreement has not changed since the SBA’s review. If there is no previously negotiated 2015 or 2016 SBA Addendum, then the universal addendum must be used instead. Use of the SBA Form 2463 and the prior negotiated 2015 or 2016 SBA Addendum will satisfy affiliation concerns.
• The SBA modified the universal addendum to provide for a drop-down box to allow the entity to select the appropriate type of agreement (i.e., a franchise, license, jobber) and also to change the titles of the parties to the agreement (franchisor/franchisee or licensor/licensee). There is also an option to manually enter another type of agreement name. Further clarifying language under the “Covenants” section and “Employment” section was added to address some industry concerns.
• The SBA also revised its current policy on applicants with multiple agreements. SBA will now only require review of agreements that are critical to the applicant’s business operations. SBA considers agreements to be “critical” if when they account, individually or in the aggregate, for at least 67% of the revenues of the small business applicant.

As a reminder, the franchise agreement and any addendum (or certification referenced above) must be executed prior to disbursement for a 7(a) loan and prior to submission of the closing package to the SBA for debenture funding on a 504 loan. If a lender does not have the universal addendum or SBA Form 2463 with SBA negotiated addendum at the time of loan approval, certain language must be added to the authorization (as set forth in the notice).

While it is not clear in the notice, it is recommended that if the universal addendum will be used, the revised form addendum should be used for all loans not submitted to the SBA for approval as of February 14, 2017. The revised SBA Universal Addendum is available on SBA’s website at www.sba.gov/for-lenders.