Surprise SBA rules needn’t spook franchisors
Attorneys are offering advice to franchisors surprised by new U.S. Small Business Administration rules, issued last December and upending the usually routine business of making government-backed loans to franchisees.
The new rules, in effect January 1, will discontinue the use of the Franchise Registry as a one-stop location where franchisors can certify that their franchisees are eligible for SBA loans.
Instead, franchisors will have to sign one SBA-issued standard agreement applying to every franchisee they sign up—something some franchisors will refuse to do, sources say—or negotiate and gain approval for each contract separately in a time-consuming exercise.
Meanwhile, lenders who want to make government-backed loans will have to certify themselves that a borrower is eligible for an SBA loan—and forego the government guarantee to reimburse them if the loan goes bad and the SBA determines the borrower wasn’t eligible after all.
The SBA says the purpose of the revisions is to “streamline the procedures” for determining whether a business qualifies as “small” and thus whether it’s eligible for a government-backed small-business loan.
That can be tricky when talking about franchised businesses. A big issue is affiliation—that is, is the small business affiliated with a larger entity (such as a franchisor) that imposes rules that impinge on the individual operator’s independence.
Cheng Cohen in Chicago says the SBA’s new standard form requires that franchisors address four key issues, and many will already have done so:
Transfer of ownership. The franchisor cannot own an interest in the franchisee, so it will agree not to exercise its right of first refusal in connection with a transfer of partial ownership interests.
Option to purchase. If the franchisor wants to purchase the franchisee’s assets but there is disagreement on the price, the value must be determined by an outside appraiser.
Real estate. The purchase option cannot include real estate if the franchisee owns the premises. Also, the franchisor cannot restrict the use of property.
Employment. The franchisor cannot directly control the franchisee’s employees.
Under former rules, franchisors could gain approval from the SBA and post their agreements once on the Franchise Registry, and then all other contracts that use the same language are approved as well.
“Now that list is going to be gone. And now we have to start over from scratch,” said Nick Jellum, president of Anastasi Jellum, a specialty law firm representing SBA lenders around the country.
He had heard about the changes at a NAGGL meeting last fall, where lenders of government-guaranteed loans gather each year, but was waiting to see the actual order when issued. “It’s exactly what I thought it would be and it’s bad,” he said in an interview in early December.
Edith Wiseman is president of FranDATA, the franchise information and research firm that operates the Franchise Registry. The day after the guidelines were issued, she was hearing from franchisors who said they didn’t like the “take it or leave it” aspect of the new rule. “Word for word from a franchisor,” she said, was “we will end our use of SBA lending.” She expects others will likely feel differently.
“I think it will be a mixed bag. Some franchisors will think, ‘I’ll just sign it, it’s easy.’ And others will have a problem with it because it is inflexible.”
She thinks the complexity could dampen SBA lending to franchisees, which FranDATA estimates represents between 17 and 22 percent of all SBA new loan volume. The SBA has a loan portfolio of $124 billion, including 7(a) and 504 loans.
“We are going to be going back to 1999, which is what was happening before the Franchise Registry existed, which is lenders are going to be negotiating one-off with franchisors,” she said. “What a shame and a waste of time, and not serving the cause of making small-business loans.”
Wiseman said the loss of business from shelving the current Franchise Registry program is negligible for her firm. “It has no meaningful impact to us because the Franchise Registry is a collection of services useful both to lenders and to franchisors,” she said.
She said outside of the NAGGL meeting, few people had been aware of the SBA’s plans. “Franchisors had never seen this before, which was kind of a shock.” She said the SBA rushed out the rule “absolutely” because of the Trump administration coming in, which could “completely change” practices at the SBA. In December Trump announced his choice of Linda McMahon, co-founder of World Wrestling Entertainment or WWE, to head the SBA.
If McMahon makes it her mission to keep small business at the front of the agenda, she will be a worthy leader.
A bit of pushback
I get a lot of feedback from readers, and enjoy every comment, which I keep in a special “hate mail/fan mail” folder.
This thoughtful letter, about my column detailing frivolous lawsuits around the Americans with Disabilities Act, made me think:
“As a polio survivor who is now in a wheelchair for most of my mobility, I strongly feel that both sides of the issue were not represented.
As a person who has filed approximately 60 ADA lawsuits in four states, I feel that the article portrayed most who file ADA lawsuits as money-motivated piranhas. I have NEVER received a penny from any of the lawsuits I have filed. I am disappointed that you did not include examples of legitimate complaints/lawsuits so that your article would actually do good by protecting the business owner and provide access for all.”
And this email, received just days into the new year, made me laugh: “Because of your article, I am unsubscribing to this publication. YOU ARE AN IDIOT!!”
I replied the only way I knew how—which article?—but never heard back.
You can’t please all of the people all of the time.
Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.