||Additional Changes to Franchise Review Process and Franchise Addendum (SBA Form 2462)
By SBA Policy Notice 5000-1941, which took effect on February 14, 2017, SBA made several major changes/clarifications to the franchise review process that was originally introduced in SOP 50 10 5(I). These changes apply to both the 7(a) and the 504 programs.
- First, SBA has temporarily provided a second addendum option for some franchisee loan applicants. The temporary change exempts some franchisee applicants from the requirement that an SBA Franchise Addendum (SBA Form 2462) be executed in order to establish that the franchisor and the franchisee are not affiliated. This exemption applies ONLY to franchisee arrangements where, prior to January 1, 2017, SBA had negotiated an addendum (“SBA Negotiated Addendum”) with the franchisor in connection with a 2015 or 2016 franchise agreement. In addition to providing all other required franchise-related documentation, applicants applying under this second option must provide both the SBA Negotiated Addendum and the new Franchisor Certification (SBA Form 2463).
The Certification form requires the franchisor to certify, under penalty of perjury, that it has a previously negotiated addendum which allowed SBA to conclude that there was no affiliation between the franchisor and the franchisee.
The franchisor also must certify that the current franchise agreement includes the SBA negotiated addendum and that the terms of the current agreement that affect affiliation have not been changed from those in the franchise agreement reviewed by SBA. The acceptance of this documentation in lieu of the revised SBA Addendum (SBA Form 2462) will be allowed only “until further notice”.
Templates for both the revised Addendum (SBA Form 2462) and the new Certification (SBA Form 2463) were provided with the Notice and fillable versions are available here. SBA has indicated that the fillable form also will be available soon at www.sba.gov/for-lenders.
- Secondly, the notice made several permanent revisions to the SBA Franchise Addendum, SBA Form 2462, that originally appeared as Appendix 9 in SOP 50 10 5(I). Despite the fact that the form is called a “Franchise Addendum”, SBA always intended that it apply to all franchise and similar relationships including license, dealer distributor, jobber, etc., that meet the Federal Trade Commission (FTC) definition of a “franchise”. But, because of the way that the form was titled, some entities that were parties to non-franchise relationships were uncomfortable with executing the form. Therefore the new form now offers options to allow the entities to select the appropriate type of agreement (e.g., franchise, license, jobber, etc.), and the proper titles for both parties executing the agreement (e.g., franchisor/franchisee, licensor/licensee, etc.). In addition, the revised Addendum also allows the parties to manually enter other types of agreements such as management agreements.
In addition to the identifying changes that have been made to the form, the revised Addendum also changes some of the conditions imposed by the Addendum:
- The revised Addendum now extends to all loans made under the same franchisor/franchisee arrangement. Instead of requiring a separate Addendum for each loan made with the same lender and franchisee/franchisor structure, the Addendum now remains in effect until SBA no longer has an interest in ANY loans made under the same franchisor/franchisee relationship.
- The signature blocks on the Addendum have been revised to state that the persons executing the Addendum are authorized to do so, and to add language indicating that the submission of false information in criminal and administrative penalties.
- Under the section headed “covenants”, the revised Addendum clarifies that if the franchisor has previously recorded any prohibited restrictions on the property owned by the franchisee, the franchisor must remove those restrictions from the title in order for the franchisee to be eligible for SBA financing.
- Under the section headed “Employment”, the revised Addendum clarifies that when the loan applicant operates in the temporary personnel industry, the temporary employees must be employed by the franchisee.
3. The notice also provides additional clarification to several aspects of the franchise review process.
A. Multiple Agreements:
When a franchisee operates under multiple agreements, SBA will only require review of the agreement(s) [or product, service or trademark covered by such agreement(s)] that are “critical” to the Small Business Applicant’s business operation in order to determine if the agreement(s) meets the FTC definition of a franchise and therefore subject to one of the two Addendum requirements. The notice defines “critical” as being when the product, service or trademark accounts, individually or in the aggregate, for at least 67% of the applicant’s revenues. So, for example, if the loan applicant is an independent auto parts store and sells tires under one or more agreements with a tire manufacturer, those agreements would only have to be reviewed if together they represented 67% or more of the applicant’s total revenues.
B. Required Documents and Timing of Execution:
As part of the loan application process, the lender must obtain:
• A copy of the franchise agreement and
• Either the revised SBA Addendum or Certification and SBA Negotiated Addendum, AND
• All other documents the franchisor requires the franchisee to sign.
When processing through SBA’s Loan Guaranty Processing Center (LGPC), the required documents must be provided to the LGPC as part of the application package.
For both delegated and non-delegated processing – while these documents do not have to be executed at the time of loan application, they MUST be executed before ANY disbursement is made on the loan.
If the documents are not executed prior to loan approval, the following language MUST be manually inserted into the Loan Authorization by either the lender or the LGPC:
“Lender must obtain the executed Franchise Agreement, either (i) the SBA Addendum to Franchise Agreement (SBA Form 2462), or (ii) the Certification (SBA Form 2463) and SBA Negotiated Addendum, and all other documents the franchisor requires the franchisee to sign prior to any disbursement of Loan proceeds and retain in the loan file. Failure to obtain the executed documents may result in a denial of liability on the guaranty.”
C. Additional Requirement – Delegated Processing:
A lender processing under its delegated authority MUST “ensure that the system meets all SBA eligibility requirements”. This means that the lender must review all documents that the franchisor requires the franchisee to execute to ensure that the system meets all SBA Loan Program Requirements (e.g., the business operations do not involve discrimination in hiring or patronage, there are no restrictions recorded against the real estate, etc.).
SBA is continuing to answer questions related to the franchise process through a dedicated mailbox: FranchiseFY2017@sba.gov. Please copy firstname.lastname@example.org on any questions sent to that email so that we can be aware of the types of issues that are arising in connection with the revised process.
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