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February 24, 2011

Firm News for February: How to Use the SBA Franchise Findings List

By: Michele L, Courneya, Esq.

In addition to consulting the Franchise Registry, lenders must now review the SBA Franchise Findings List when performing franchise eligibility reviews. See SOP 50 10 5(C) Subpart B, Chapter 2, Paragraph III.B.8.(d) at page 93. This list is kept on SBA’s lending website, and can currently be found by clicking on the link below. Lender should also request the SBA loan history and statistical data from franchise@sba.gov.

The SBA Franchise Findings List provides lenders with information on franchise, license, dealer, and jobber agreements that have been reviewed by SBA counsel and found ineligible. It includes the franchise name, type of agreement, issues resulting in the ineligibility finding, whether a fix was negotiated, and, if the franchise is now on the Franchise Registry, the initial date of listing. This list is intended to give lenders a heads up about issues SBA has discovered and whether the franchisor may be willing to negotiate change in the agreement to make it eligible. Unlike the Franchise Registry, the Franchise Findings List does not provide a definitive determination of the eligibility of the listed franchises or their agreements.

As it states on the Franchise Findings website, “This list is only a guide and is not a substitute for a full review of the Agreement.” The list was compiled based on franchise eligibility reviews conducted by SBA counsels over a period of over a dozen years. The date of the reviews and the dates of the agreement(s) reviewed for the franchises on the list are not provided. The lender could have a completely different agreement from the one reviewed or a different version. The franchise could be new. In addition, there are now different rules in effect governing eligibility that were not in effect 10 years ago. For instance, the rule that the franchisor cannot have a right of first refusal to purchase only a partial ownership interest in the franchisee’s business has only been in effect since October 1, 2010. Here is what to do if you review the Franchise Findings list and discover:

1. The franchise is not listed. This does not mean it’s eligible. This means SBA has not previously done a review of this franchise, or not found a problem if a review was performed. You must:

a. Review the Franchise Registry.

b. If the franchise is not on the Registry, the applicant’s agreement is dated before the initial listing date, or the franchisor cannot provide a Certificate of No Change or Non-Material Change, review all the franchise documents to determine eligibility under SBA’s guidelines.

c. If any eligibility issues are found, these must be resolved with a written change to the agreement executed by the franchisor before closing. This can be an amendment, addendum, or even a letter agreement, but it must be in writing.

d. Keep a copy of the documents reviewed, the written eligibility determination, and any fixes negotiated in the file. The determination should state that the Franchise Registry and Franchise Findings lists were reviewed and whether you found the franchise on either list.

2. The franchise is listed showing a fix was negotiated. This does not means it is eligible. Only franchises listed on the Franchise Registry are considered eligible, and lender may only rely on the Registry listing if the franchisor provides a Certificate of No Change or Non-Material Change. In addition to performing steps a, b, c, and d listed above, you must:

e. Specifically discuss whether the agreement you reviewed contains any of the same eligibility issues as those listed on The Franchise Findings list. If so, these must be resolved with a fix negotiated with the franchisor.

f. Send an email to franchise@sba.gov and request a copy of the fix negotiated by SBA. Use this fix if it resolves any eligibility issues in the agreement you reviewed. If not, then negotiate an appropriate fix with franchisor, and consult with SBA District Counsel or the SBA Franchise Counsel with questions regarding the fix. Questions can also be sent to franchise@sba.gov.

3. The franchise is listed, but is now on the Franchise Registry. You must check the date of the agreement between the applicant and the franchisor to determine if the franchise agreement is eligible:

g. If the date is after the date of initial listing on the Registry, you must obtain a Certificate of No Change or Non-Material Change from the franchisor. You should also send an e-mail to franchise@sba.gov and ask for a copy of any Addendum required for the franchise agreement listed on the Registry to be eligible. Any such Addendum must also be executed before closing and kept in the file with the executed franchise agreement.

h. If the agreement is dated before the date of initial listing, or franchisor does not provide the appropriate certification, you must perform steps a through f listed above. You should also send an e-mail to franchise@sba.gov and ask for a copy of any Addendum required for the franchise agreement listed on the Registry to be eligible. This Addendum may address the same eligibility issues as the agreement you reviewed and can be used as the basis for a fix.

For more information on the franchise finding list, contact Michele at mcourneya@starfieldsmith.com, or 612-208-0877.

http://archive.sba.gov/idc/groups/public/documents/sba_program_office/elending_franchise_findings.xls