The Small Business Administration’s “7(a)” loan program serves as a reliable and effective source of financing for new franchisees. The SBA 7(a) Loan program is the primary loan program offered by the SBA for franchisees who are purchasing a franchise and establishing their franchised operations. Under this program, the SBA does not issue any loan but, rather, encourages SBA qualified banks to loan funds to qualified start-up business owners and, in turn, the SBA will guarantee to the bank repayment of a significant portion (up to 85%) of the loan.
The value of SBA 7(a) Loans are readily apparent to franchisors as these loans may serve as a solid source of financing for new franchisees. Naturally, SBA 7(a) loans involve a more stringent review and qualification process. This review and qualification process not only applies to “borrower franchisees” but also to the franchisor and, in particular, the nature of the franchise relationship and the terms of the relevant franchise agreement. So, when preparing, developing and updating your FDD and franchise agreement, as a franchisor, you must be aware of SBA franchise agreement qualification requirements. Some of the many SBA underwriting loan requirements and/or regulations that may impact your franchise agreement include:
The SBA recognizes that franchisors possess a legitimate concern as to franchise transfers and that franchisors must maintain a right to review and approve the transfer of a franchised business. However, for the SBA – the entity that will be determining whether or not to approve a loan to your franchisee – a franchisor’s right to approve transfers cannot be absolute or unrestricted. That is, the franchise agreement must include some language and right whereby the franchisor acknowledges that the franchisor’s review and approval of a franchise transfer shall “not be unreasonably withheld or delayed”.
Liquidated damage provisions in franchise agreements, typically, relate to an agreed upon formula or monetary amount that franchisor and franchisee agree to (at the time of signing the franchise agreement) for the purpose of determining the amount of damages the franchisor may be entitled to in the event that the franchisee breaches the franchise agreement. Naturally, if a franchise agreement default occurs, the SBA wants to ensure that potential repayment of the SBA guaranteed loan is not jeopardized by an excessive award of damages to be paid by franchisee to franchisor. Accordingly, the SBA scrutinizes franchise agreement liquidated damages provisions and requires that these provisions be “reasonable.” These provisions should only be triggered after a breach of the franchise agreement and, at the time of signing the franchise agreement, the nature and potential amount of the liquidated damages must be reasonably ascertainable.
For franchisors, the SBA conducts a pre-approval process wherein the SBA will review and evaluate your franchise agreement and your franchise offering. If approved, your franchise will be added to a registry of SBA approved franchisors. This approval does not guarantee that the SBA will approve loans to your franchisees but, rather, will serve to expedite the review process should a franchisee apply for an SBA loan. Start-up franchisors should consider this review process as a good test of their franchise agreement and a great opportunity to identify potential problems and recommended franchise agreement modifications.
Are you are franchisor? Find out how our Franchise Counsel Program can help you upgrade your FDD to improve franchise sales.
Are you a franchisor or a part of a franchise sales team? Do you want to learn more about franchise sale compliance and ensure that your sales practices comply with franchise laws and are consistent with best practices? Then this guide is for you. In this guide you’ll learn the... read more
In this guide you’ll learn the basics of franchising, how to franchise your business, and how to win at franchising. We’ll also take a deeper dive into legal requirements for franchising and why they matter, steps to take before and after you launch your franchise, and even some tips on... read more
When considering expanding a business both franchising and licensing are possible options. In this guide, you'll learn the differences of franchising and licensing and understand how each will affect you. read more
Are you a successful business owner? Are you looking for ways to expand your business? If so, this article will provide the answers you need to decide whether franchising your business is the right step for you. In short, franchising allows you, the franchisor, to create a relationship among several... read more
Under federal law, prior offering or selling a franchise in any state, franchisors are required to disclose a franchise disclosure document (FDD) to their prospective franchisees. In addition to federal law certain states, including the franchise registration states, require that franchisors register their FDD with the state. The legal documentation... read more
Franchising may be the next big step for your business and represents an opportunity to grow your brand. So, how do you know if franchising is right for you? How do you know if your business is franchisable and, if it is, whether or not you should franchise your business?... read more
In this webinar, Charles Internicola and Laura Meyer, founder of Joybrand Creative, talk about how to position your brand to win at franchise sales. Some topics include: How franchisors can develop their brand strategy How to differentiate your brand strategy between your targeted end-user customers and prospective franchisees for franchise... read more
In this webinar, Charles N. Internicola, Esq. and Lisa Welko, CFE of Integrity Franchise Group discuss what it takes to make your brand attractive to franchise brokers and sell to qualified franchisees. Selling franchises and building a durable franchise system - all comes down to being a "good franchisor," making... read more
Key strategies to accelerate franchise growth for startup and emerging franchisors In this webinar, franchise attorney Charles Internicola and Nick Powills, founder of No Limit Agency and 1851 Franchise, discuss key strategies to accelerate franchise growth through PR and digital media. Some topics include: Steps franchisors should take when it... read more
With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your business.
Fill out the following form and we’ll contact you as soon as possible. To reach our team directly, give us a call at (800) 976-4904.
An attorney client relationship is not established by submitting this initial contact information.