SBA FRANCHISE/LICENSE/ DEALER ELIGIBLITY. Stephen J. Olear SBA Senior Franchise Counsel Los Angeles District Counsel

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1 SBA FRANCHISE/LICENSE/ DEALER ELIGIBLITY Stephen J. Olear SBA Senior Franchise Counsel Los Angeles District Counsel

2 Franchise Eligibility/Affiliation ISSUE: Based on the franchise documentation, is Franchisee affiliated with Franchisor and too large under SBA size standards.

3 SOP CHANGES Franchise Findings Cleaned up the language under franchise findings to state as follows: Lenders must check the SBA Franchise Findings List to review specific findings and see if there have been any findings for a particular Franchise, which if still in the Agreement, would make the Agreement ineligible.

review specific findings and see if there have been any findings for a

4 What has SBA done to make the review easier. Lenders/CDC s should review the franchise findings list found at This list will assist with issue spotting. It identifies a franchise system and notes issues that have been found in reviews done by SBA counsel. The list is not an eligibility determination if the agreement is not on the registry then it must be reviewed. The findings list assists with the review by identifying potential issues.

It identifies a franchise system and notes issues that have been found in reviews done by SBA counsel.

5 What if I find my agreement on the Finding LIst If you find your agreement on the finding list all this means is that it has previously been reviewed by SBA. You should check to see if your agreement has similar issues Please note that in some cases the issues will have been resolved for future agreements. You still must review the Agreement in all cases

You should check to see if your agreement has similar issues Please note that in some

6 What if there is a fix identified on the findings list? If there is a fix identified on the findings list the fix will only address the issues noted on the findings list. In most cases, this will address all the issues, however the Lender/CDC must still review the agreement to make sure there are no other issues. A fixes chart will be available shortly.

7 SOP Changes Control (vii) Updated language Require that the billing activities for the applicant be handled by the Franchisor or Third Party chosen by the Franchisor Added or Third Party Chosen by Franchisor

handled by the Franchisor or Third Party chosen by

8 SOP Changes Control (viii) updated Language: Require the franchisee or EPC owner to sell their real property to the franchisor upon expiration or breach of the Agreement. Force lease OK for the term of the agreement* Added or EPC owner E changes to OK lease for term of agreement

9 SOP Changes Transfer Added Language that states: Reasonable Business Judgment is not acceptable standard.

10 SOP Changes Industry Standard Moved the information regarding Fitness Industry to a new place and created a Fitness Industry standard.

11 SOP Changes New Registry Process

12 Case Studies Case Study I Is the Agreement Critical? Does it have to be reviewed?

13 1. Is the Agreement a Franchise Agreement An agreement (franchise/license/dealer/jobber etc) is a franchise agreement for SBA purposes if: It provides a product or service critical (substantially affects the borrowers ability to repay the debt) to the borrower s operation, and/or A critical trademark If the agreement meets this test it must be reviewed. The franchise does not have to be listed with FTC or have a UFOC/FDD to be a franchise for SBA purposes.

ability to repay the debt) to the borrower s operation, and/or A critical trademark If the agreement meets this

14 Case Study No. 1 The Goodyear Exception Does a Goodyear Tire Agreement need to be reviewed: A. Look to the type of business you are going to be financing - Is it a Tire Business or another type of business that sells tires. If the business is a tire business then the Agreement MUST be reviewed as well as all Tire Dealer Agreements.

Look to the type of business you are going to be financing - Is it a Tire Business

15 Case Study No. 1 (con t) B. If the business is NOT a Goodyear Tire business then determine if the Agreement is Critical to the Operation of the business. 1. Look to the financial impact of the type of goods or services that agreement provides. 2. If it is not clear, you can send to franchiseappeals@sba.gov for a determination.

is Critical to the Operation of the business. 1.

16 Case Study No. 1 (con t) Dealer Agreements Single Product Line 67.7% Test Multi-product line businesses

17 Case Study No 2 Marriott Hotels Marriott Hotel Agreements include a provision that prohibits transfer to a competitor of the Hotel and define competitor. This is acceptable however in Marriott s case, they require this provision to be recorded which we object to. Marriott has agreed on a case by case basis to waive the ability to record the Competition Provision

This is acceptable however in Marriott s case, they require this provision to be recorded

18 Case Study No. 2 Management Agreements In some Hotel Loan Cases, the Franchisor requires the franchisee to sign a management agreement. For the most part Management Agreements are acceptable - provided that the Management Company is not affiliated with the Franchisor. The Franchisee still has control over the employees.

19 Case Study No 3 Cleaning Industry The Cleaning Industry provides for a Multi-Level Franchise System. A. Master Franchisor Contracts with the Sub Franchisor to develop and area B. Sub-Franchisor Actually negotiates the contracts, orders the supply s, does the billing and collects the fees. C. Franchisee Performs the cleaning work.

Master Franchisor Contracts with the Sub Franchisor to develop and area B.

20 Case Study No. 3 In this situation the Sub-Franchisor handles most of the services that should be handled by the Franchisee however they do not do the cleaning The Franchisee does the cleaning but does not handling any billing, does not collect fees, and does not negotiate contracts. The System is NOT Eligible

should be handled by the Franchisee however they do not do the cleaning The

21 Case Study No. 4 Partial Transfer Issue The Agreement provides as follows: Franchisee s written request for consent to any Assignment must be accompanied by an offer to Franchisor of a Right of First Refusal to purchase the interest which is proposed to be transferred The Agreement defines assignment as: Sale,assignment, transfer conveyance, or other encumbrance of more then 49% intrst.

22 Case Study No. 4 (con t) The way this is presented in most agreements is in the transfer section the way transfer is defined usually includes partial transfer. A potential fix for this issue includes the ability of the franchisor to consent to the transfer provided the consent is not unreasonably withheld.

23 Liquidated Damages Liquidated Damages clauses should be reasonable. Triggered on the breach of the franchisee/borrower Reasonably ascertainable when the agreement is signed. They should not be recorded against the real estate collateral.

24 Case Study No. 5 When Consent is NOT required There are agreements that provided for automatic transfer provided that conditions are met (Best Western / Marriott) Language includes: Franchisor will notify Franchisee of Franchisor s election of one of the following two alternatives: 1. Franchisor s election to consent to such Transfer, together with conditions to the Transfer which include

25 Gas Station Issues The eligibility determination for all Gas Station Loans must include a review of the relevant documents for provisions that: 1. Enable an oil company or another non-small Person to exert significant control over the small business resulting in affiliation; 2. Have a significant negative impact on the marketability and collateral value of the Property; 3. Impair the applicant s repayment ability.

26 Affiliation Issues Purchase Options Repurchase Options which allow a major oil company or jobber to repurchase the applicant s primary business assets (i.e., real estate) due to violation of any conditions, covenants or restrictions in any agreement between the oil company or jobber and the applicant business Rights of First Refusal are acceptable

27 Marketability Issues Deed Restrictions, covenants, easements, reversionary interest and other provisions that restrict the use of the Property for the benefit of the seller, an oil company, or any other person such as those that restrict the brand of fuel that can be sold on the Property.

28 ARCO ARCO requires a group of documents for each type of station which include: AM/PM Minimart Agreement Contract Dealer Agreement SBA has worked out a fix for these agreements in the form of a Intercreditor Agreement which would be required in all cases

29 ARCO (con t) ARCO does not allow fixes to individual agreements, only for a type of station. Currently the SBA is able to do ARCO stations that result in Ground-Up Construction or Change of Flag Stations that have been previously owned by ARCO are NOT eligible.

30 CHEVRON We have negotiated the following with Chevron: 1. Addendum to fix the transfer issue in the dealer/fuel supply agreement 2. ROFR newly negotiated In some cases, there is an old ROFR on the property which Chevron has agreed to re-convey

31 SHELL There are issues with Purchase Options and Branding Restrictions Shell issues are determined on the current status of the property. 1. Shell still the owner 2. Shell has sold to a jobber

32 Exxon/Mobil We have identified issues in the Grant Deed from Exxon to a 3 rd party owner: 1. Purchase Options branding restrictions. 2. Environmental liability issues 3. Engineering Controls.

33 Conoco Phillips Conoco has updated their current agreements to include the correct transfer language (older agreements may require an addendum). Conoco has purchase options recorded against some of their real estate locations which they reconvey on a case by case basis

34 VALERO The following issues have been identified in Valero Agreements: 1. Transfer Provision Issues 2. Purchase Option Issues 3. Environmental Liability Issues

35 Franchise Appeals SBA has established an appeals process. If you do not believe an SBA Employee has issued a correct opinion based on the current version of the SOP you may appear your decision to the Appeals mailbox at franchiseappeals@sba.gov

36 Appeals (con t) The Appeals mailbox may also be used to get an opinion on a fix or an issue that may require additional guidance.

37 Who to Contact with Questions SBA Senior Franchise Counsel, Stephen J. Olear (818) Field and Center Counsel

No Environmentally Sensitive NAICS Codes. Environmentally Sensitive NAICS Codes. No Further Investigation 9

No Environmentally Sensitive NAICS Codes. Environmentally Sensitive NAICS Codes. No Further Investigation 9 KILBANE Environmental, Inc. 1. Compare identified NAICS codes to SBA environmentally sensitive codes (see attached). Treat units in multi-unit buildings as having no environmentally sensitive codes. 2.