March 7, 2018

Best Practices: Reviewing Management Agreements under SOP 50 10 5(J)

by Jennifer E. Borra

All SBA loan applicants and their affiliates must be small, when aggregated together, under SBA size requirements to participate in SBA’s lending programs. In determining whether affiliation exists, SBA analyzes an applicant’s ownership, management, and franchise, license or other agreements and relationships at the time of application. One type of affiliation may arise where a single individual, concern or entity controls the management of the applicant business through a management agreement. For lenders, affiliation determinations under SBA guidelines are not always straightforward. However, the current version of the SBA SOP provides some new guidance to lenders in determining whether a management agreement creates affiliation between the management company and the applicant, thereby necessitating the management company to be included in the applicant’s size standard analysis.

When a potential loan involves a management agreement, lenders processing loans under their delegated authority must (i) obtain a copy of the management agreement, (ii) conduct an affiliation analysis in accordance with 13 C.F.R. ยง 121.301(f)(3), and (iii) retain a copy of the agreement and a detailed affiliation analysis in the loan file. Non-delegated lenders must submit a copy of the management agreement to the LGPC with their application for review by the center’s SBA personnel. SBA franchise counsel do not review management agreements and such agreements will not appear on the SBA Franchise Directory.

If an applicant has a management agreement, and the management company has sole discretion to manage the operations of the business, including control over the employees, the finances and bank accounts of the business, with no involvement by the owners of the applicant business, then the applicant is deemed a passive business and is ineligible for SBA financing. Additionally, if a management agreement meets the FTC definition of a franchise, and is not listed on the SBA Franchise Directory, the applicant is ineligible for SBA financing.

If an applicant has a management agreement, and the business is deemed an active business, affiliation may occur when the management company has sole discretion over the business operations with minimal oversight of managerial decisions by the applicant. In such cases, Lenders should confirm that the applicant, the management company, and all affiliates together meet the size standard for the particular industry.

If an applicant has a management agreement, and the business is deemed an active business, affiliation is not created between the applicant and management company, if the management agreement includes meaningful oversight by the applicant over the management company’s activities. SBA defines meaningful oversight as providing the applicant with explicit authority as stated in the management agreement to, at a minimum, undertake all of the following:

  • Approve the annual operating budget;
  • Approve any capital expenditures or operating expenses over a significant dollar threshold;
  • Have control over the bank accounts; andHave oversight over the employees operating the business (who must be employees of the applicant business)

SBA continues to update its guidance for reviewing management agreements and determining eligibility of franchise concepts that utilize management companies. Lenders should take care when reviewing management agreements to verify eligibility and make correct affiliation determinations. We will provide updates on any further changes or developments as they relate to management agreements as they become available. For more information regarding affiliation issues, please contact Jennifer at or at 267-470-1206.