September 19, 2018

Best Practices: Determining Affiliation of Nontraditional “Franchise” Agreements under SOP 50 10 5 (J)

by Jennifer E. Borra

In my December 13, 2017 article, I provided an overview of the franchise review process under the SOP 50 10 5(J). See For SBA loan applicants operating under traditional franchise agreements, the process for determining eligibility and affiliation is relatively straightforward. Under the SOP 50 10 5 (J), SBA maintains a list of eligible franchises on its SBA Franchise Directory (“Directory”). Whether an addendum is needed or whether a Lender needs to address additional issues can be readily discerned. However, when applicants have “nontraditional” agreements which may or may not meet the FTC definition of a franchise – and these “brands” are not listed on the Directory – how should lenders proceed? This article will briefly discuss some nontraditional franchise type agreements and best practices for determining affiliation.

Fuel Supply/Jobber/Dealer Agreements

While not subject to FTC disclosure requirements, SBA has indicated that all agreements covered by the Petroleum Marketing Practices Act (PMPA) are included within the FTC definition of a franchise. Lenders should therefore check the Directory to determine if the jobber’s fuel supply agreement is listed; if it is listed, review any additional issues identified by SBA and proceed. However, if the fuel supply agreement is not listed on the Directory, it is subject to SBA’s review and approval prior to proceeding. Lenders processing loans involving these types of agreements should obtain a full copy of the agreement with any related exhibits, and send to the SBA franchise mailbox for review. Whether SBA will require additional documents between the supplier and oil company is dependent upon the type of arrangement between the applicant and supplier, and the terms of the subject agreement.

Financial Advisor/Insurance Agent Agreements

Applicants may have agreements with a broker/dealer/insurance company in which the borrower is to act as an independent agent providing financial advice or insurance services and products to consumers. While a few appear on the Directory as meeting the FTC definition of a franchise, many do not. Accordingly, Lenders should proceed with caution in processing loans under their delegated authority involving these types of relationships. If the agreement is not listed on the Directory and there is uncertainty whether the agreement meets the FTC definition of a franchise, lenders should send the agreement to the SBA franchise mailbox for an affiliation determination.

Vendor/Product Supply Agreements

Other agreements that may create affiliation challenges for Lenders include vendor agreements/product supply agreements and supply chain agreements that may involve agreements with corporate resellers. There are inherent risks when determining whether any such agreement meets the FTC definition of a franchise due to the subjective nature of the analysis. To minimize the risk of a potentially incorrect determination, lenders always have the option to send agreements to SBA for review either through general processing methods or through the franchise mailbox.

For assistance with SBA franchise and affiliation matters, please contact Jennifer at 267.470.1206 or