Franchise Agreements and the 7(a) Program by Mary Frias

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1 March 18, 2015 Ms. Mary Frias U.S. Small Business Administration Office of Financial Assistance 409 Third Street SW., 8 th Floor Washington, DC Re: Notice/Request for Comments re Franchise Agreement Reviews, Affiliation and Eligibility for Financial Assistance [Docket Number: SBA ] Dear Ms. Frias: The National Association of Government Guaranteed Lenders (NAGGL) appreciates the opportunity to provide comments to the U.S. Small Business Administration (SBA) regarding appropriate changes to the Agency s requirements and processes for determining eligibility for participation in the 7(a) program by businesses operating under franchise and other business agreements. NAGGL is a trade association that represents the interests of over 800 institutions that either participate as lenders in SBA s 7(a) and 504 programs, or provide support services to the lending industry. Our comments reflect the concerns that our members have voiced regarding SBA s current process for determining franchise eligibility. NAGGL members have had longstanding issues regarding the factors that SBA considers when determining the eligibility of a franchise or other similar business agreement, as well as the process required for making such eligibility determinations. Specifically, NAGGL believes that the existing requirements and processes are unduly burdensome and confusing and serve as a deterrent to lenders ability to provide much needed capital to entrepreneurs looking to start or grow a small businesses within a franchise structure. For that reason, NAGGL applauds the Agency s commitment to reassessing its franchise eligibility requirements and review process, and looking for ways to better meet the needs of this important business sector. NAGGL strongly believes that franchise lending is good for America s economy overall and for its small business sector. Statistics show that franchises support 8.9 million direct jobs and $890 billion of economic output for the U.S. economy. And, according to The Franchise Business Economic Outlook: 2015 prepared for the International Franchise Association (IFA) Educational Foundation by IHS Economics, for the past five years, [b]y most measures, the franchise sector continues to grow at rates that exceed the economy wide growth of industries where franchises are concentrated. In addition to the significant contributions that franchise businesses make to the U.S. economy overall, the unique business structure under which they operate provides special opportunities for 1 P age

2 new entrepreneurs, especially those in traditionally underserved markets, to realize their dreams of starting and growing their own small businesses. To many of these entrepreneurs, SBA guaranteed loans are a crucial, and, as described by IFA, sometimes the funding of only resort available to assist them to open new, or expand existing, franchise businesses. By providing SBA guaranteed loans to the franchise business sector, SBA helps to fulfill its mission of aiding and assisting small businesses. However, in its attempt to assure that loans are made only to franchises operating under eligible agreements, SBA has made its eligibility requirements, and the processes by which it determines franchise eligibility more and more difficult and complicated. In addition, in recent years, SBA has expanded the types of agreements that it looks at beyond the franchise and license agreements mentioned in SBA regulations to include dealer, jobber, similar and critical agreements. The unintended consequence of the current process is that SBA actually is discouraging lenders from making SBA backed loans to franchise and other businesses operating under business agreements, thereby preventing capital from being made available to these important small businesses. NAGGL believes that SBA can expand the availability of credit to this sector, without increasing risk to the Agency, by adjusting the standards that it uses, and its processes for determining, franchise eligibility. We hope that our recommendations will be helpful to this process. SUMMARY OF MAJOR NAGGL RECOMMENDATIONS: In the attachment to this letter ( Attachment ), NAGGL has included its responses to each question asked by SBA. We believe that our comments and recommendations are in concert with the language and intent of the Small Business Act and the Code of Federal Regulations. NAGGL believes that SBA s current requirements reflect a very proscriptive approach to implementing the Small Business Act and existing regulations regarding the eligibility of franchise businesses. Our recommendations reflect an appropriate reading of the Small Business Act which we think is fully consistent with the law s express terms as well as SBA s mission to facilitate the making of commercial loans on reasonable terms to all small businesses, including those that operate within a franchise structure. In summary, our major recommendations are that: 1. SBA amend its regulation regarding franchise and license agreements, 13 CFR (i), to better reflect the intent to make it easier, not harder, to lend to franchise businesses. For example, this regulation could be amended to read as follows: 2 P age Affiliation based on franchise and license agreements. A business concern is not affiliated with a franchisor or licensor by provisions of a franchise or license agreement if the franchisee or licensee remains an independently owned and

3 operated business. In determining whether affiliation exists between the franchisor or licensor and the franchisee or licensee based on the franchisor or license agreement, SBA will rely on a certification from the franchisor or licensor that: 1) The Applicant s business is or will be independently owned and operated; 2) The Applicant has or will have the right to profit from its efforts and bears the risk of loss commensurate with ownership; 3) The Applicant s Business and the franchise do not share common ownership or management; and 4) The Agreement does not contain excessive restrictions upon the sale of the franchise interest. Affiliation may arise, however, based on circumstances not related to the franchisor or license agreement as described in 13 CFR In accordance with the proposed regulation, after obtaining a Franchisor Certification and Addendum (depending on one of two options presented by NAGGL) as specified and described more fully in the Attachment s Exhibits A and B, the lender s obligation to determine the business s independence of operations would be complete. As indicated in the suggested regulatory language, the lender still would be required to determine whether there were other bases for finding affiliation between the loan applicant and a party other than the franchisor. In addition, the lender would remain obligated to determine that the loan is otherwise eligible, including the eligibility of the business s operational structure, and creditworthiness. 2. The current franchise agreement review process be eliminated, and SBA adopt a process that would allow franchisors, and other entities who enter into similar business relationships with independent small businesses, to self certify that their agreements will not interfere with the independence of the small business. Use of a self certification process would be consistent with the way that SBA handles issues of size for purposes of its procurement programs; and more importantly, it would relieve SBA and lenders of the burden of having to examine each agreement for purposes of determining whether it is eligible. This should result in significant savings of manpower and other resources, bolster the Agency s SBA ONE initiative, and result in more expeditious financing at lower costs to small businesses. 3. SBA reassess its position on which agreements require eligibility determinations and adopt standard definitions to be used by lenders and SBA to determine which contractual relationships require eligibility determinations. We are also recommending that SBA s loan application form (SBA Form 1919) be amended to clarify to borrowers which business relationship situations require an eligibility determinations. 3 P age

4 4. SBA should discontinue the Franchise Registry. If SBA adopts NAGGL s recommendation and establishes a franchisor self certification process, the registry will no longer be necessary. However, if SBA decides to continue a review process whereby each agreement will be scrutinized individually, a registry like listing of eligible agreements will be required. But, in that case, NAGGL strongly recommends that either SBA maintain the list itself, or that any vendor providing this service be subject to the provisions of the Federal Acquisition Regulations and that the contract include only the custodial and ministerial functions of maintaining and providing access to lenders and potential loan applicants of a list of those franchise agreements that have been found by SBA to be eligible SBA loan purposes. The contractor should not make decisions regarding eligibility, and SBA, not the vendor, should be the entity with whom the franchisors negotiate when issues of eligibility need to be resolved. NAGGL s recommendations are discussed more fully in the Attachment which provides the association s responses to SBA s questions. We would like to again thank you for this opportunity to make the views of NAGGL s members known to SBA on a formal basis, and also would like to offer our help and continuing support as SBA works through this very difficult issue. Sincerely, Anthony R. Wilkinson President and Chief Executive Officer cc: Ann Marie Mehlum, Associate Administrator, Office of Capital Access 4 P age

5 Attachment NAGGL RESPONSES TO QUESTIONS POSED BY SBA Background NAGGL understands that SBA s requirements regarding the eligibility of franchise businesses for support via SBA loans are rooted in the statutory authority that requires SBA only to provide assistance to independently owned and operated small businesses that are not dominant in their fields. However, we believe that the current requirements for determining eligibility and the process for making franchise eligibility decisions are unnecessarily burdensome to SBA, to lenders and to applicants. With regard to the issue of size for purposes of eligibility for participation in SBA programs, the Small Business Act ( 3. DEFINITIONS) requires only that a business be one that is independently owned and operated and which is not dominant in its field of operation. The statute then charges the SBA administrator to establish detailed definitions or standards by which a business concern may be determined to be a small business concern utilizing standards such as number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors. The statute is silent as to any specific eligibility requirements that must be applied to franchise business operations, other than the mandate that applies to every business, that it be independently owned and operated and not dominant in its field. It is the requirement that a business be independently owned and operated that SBA has determined creates the requirement that it consider the nature of any business agreement between a loan applicant and a franchisor or other contractual partner. So, when promulgating its regulations to implement the statutory mandate that the SBA Administrator define size, SBA determined that, when such agreements exist, they may create affiliation between the two contracting parties such that the business seeking SBA s assistance may not be considered to be independently owned and operated. When defining various bases on which affiliation can exist, with regard to businesses that have franchise or license agreements, SBA regulations state: Affiliation based on franchise and license agreements. The restraints imposed on a franchisee or licensee by its franchise or license agreement relating to standardized quality, advertising, accounting format and other similar provisions, generally will not be considered in determining whether the franchisor or licensor is affiliated with the franchisee or licensee provided the franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. Affiliation may arise, however, through other means, such as common ownership, common management or excessive restrictions upon the sale of the franchise interest. [13 CFR (i) Emphasis added.] 5 P age

6 This regulation reflects SBA s clear intention that the mere existence of a franchise agreement, in and of itself, would not make a franchise business ineligible for an SBA loan. This regulation presumes eligibility for a franchise business except when the franchise agreement inappropriately limits the franchisee s sale of its business or when the franchisee has other size issues such as those that arise when there are other bases causing findings of affiliation not related to the franchise agreement. NAGGL RESPONSES TO SBA QUESTIONS: (1) How can the review of franchise relationships be simplified and still ensure that SBA guaranteed loans are only provided to independent small businesses as required by statute and regulation? As noted in our background discussion, NAGGL believes that the applicable statute and current regulatory requirements require far less for a determination of franchise eligibility than the exhaustive examination of agreements that the SBA currently requires via the requirements imposed by SOP and the Agency s actual practice. In order to simplify and streamline the way that it currently determines whether a business operating under franchise or similar business agreement is eligible for SBA financing, the Agency must address two areas its requirements for determining that an agreement does not impose restrictions that threaten the independence of a business operating under it, and the process for making such determinations. RECOMMENDATIONS REGARDING FRANCHISE ELIGIBLITY REQUIREMENTS NAGGL believes that the simplest and most appropriate means to address franchise eligibility requirements is by amending existing regulations to more clearly indicate that as long as there are no provisions in the franchise agreement that would impede the franchisee s independence of operations and ability to profit from its endeavors, the franchise agreement should be deemed eligible. We further believe that it is the franchisor who is in the best position to evaluate the intent of any agreement that it creates. Therefore, we recommend that the regulation should provide for a franchisor self certification process. To accomplish these objectives, we recommend that that 13 CFR (i) be amended in a manner similar to this: 6 P age Affiliation based on franchise and license agreements. A business concern is not affiliated with a franchisor or licensor by provisions of a franchise or license agreement if the franchisee or licensee remains an independently owned and operated business. In determining whether affiliation exists between the franchisor or licensor and the franchisee or licensee based on the

7 franchisor or license agreement, SBA will rely on a certification from the franchisor or licensor that: 1) The Applicant s business is or will be independently owned and operated; 2) The Applicant has or will have the right to profit from its efforts and bears the risk of loss commensurate with ownership; 3) The Applicant s Business and the franchise do not share common ownership or management; and 4) The Agreement does not contain excessive restrictions upon the sale of the franchise interest. Affiliation may arise, however, based on circumstances not related to the franchisor or license agreement as described in 13 CFR Under this amended provision, after obtaining the Franchisor Certification and Addendum as specified and described more fully in the process recommendations below, the lender s obligation to determine the business s independence of operations would be complete. As indicated in the suggested regulatory language, the lender still would be required to determine whether there were other bases for finding affiliation between the loan applicant and a party other than the franchisor. In addition, the lender would remain obligated to determine that the loan is otherwise eligible, including the eligibility of its business operational structure, and creditworthiness. If SBA decides not to amend its regulations as suggested and to allow a franchisor self certification process process, in the alternative, SBA must clearly articulate those provisions in a franchise or license agreement that it finds objectionable. The objectionable provisions must be identified in a completely objective and verifiable way. If SBA decides to continue an agreement by agreement review process, determinations that an agreement is not eligible must be based only on those provisions identified by SBA in regulations as fatal to the eligibility of a franchise or other agreement. So, if the franchisor self certification process is not adopted, NAGGL would strongly recommend that the Agency reexamine the provisions in franchise agreements that it currently finds to be conclusive evidence of control. [SOP (G), pages ] The Association believes that this list is overly restrictive and recommends that SBA delete two of the currently cited provisions: the restriction regarding the sale of personal property to the franchisor (provision 6 on the SOP list); and, the prohibition against allowing a Right of First Refusal on a partial transfer of ownership (provision 8 on the SOP list). In addition, NAGGL recommends that the list be amended to prohibit any provision that would allow the franchisor to interfere with the independent nature of the franchisee s operations as a condition of the franchisor s providing financial support to assist the franchisee to repay any loan (whether guaranteed by SBA or not) on which the franchisee has defaulted or is likely to default. Here it is important to also note that, under current practice, SBA has not regarded the referenced SOP list as all inclusive. NAGGL members have advised the Association that a large part of the problem with the current franchise eligibility review process is that many of the provisions that SBA franchise counsel find objectionable are not expressly listed, and cannot be known to franchisors or lenders unless they perform a significant number of reviews and interact regularly with SBA franchise 7 P age

8 counsel to ascertain whether specific, individual provisions are unacceptable. Questionable provisions are often identifiable only if the reviewer has extensive experience in reviewing franchise agreements for SBA eligibility experience that many lenders do not have, either because they lack the necessary sophistication or make few SBA loans (or SBA franchise loans). For this reason, in any effort to simplify the franchise eligibility process, it is critical that SBA develop a complete list of objectionable provisions that may be relied on by lenders, franchisors and loan applicants. RECOMMENDATIONS REGARDING FRANCHISE ELIGIBLITY PROCESS As to changes to the franchise eligibility review process, NAGGL would support any changes that remove from lenders the obligation to determine franchise eligibility without significantly increasing processing times. Under the current process, there are three ways that the eligibility of a franchise agreement is determined: 1) By SBA as part of its processing of a loan application; 2) By a delegated lender, acting on its own, as part of its processing of a loan application; or 3) By a delegated lender, relying on an affiliation determination provided by SBA under its Delegated Franchise Review Process. The 2 nd alternative is primarily utilized by delegated lenders who are fully familiar with SBA s franchise eligibility criteria, and who are comfortable in relying on the Franchise Registry as a determiner of eligibility. However, even when they are familiar with SBA s eligibility requirements, feedback from lenders indicates that unless an agreement is listed on the registry, because an incorrect eligibility determination can be a basis for SBA to deny its liability on a loan, many delegated lenders are reluctant to attempt to determine the eligibility of a franchise agreement on their own. In the past, this meant that loans that lenders deemed to be otherwise eligible and creditworthy were often submitted for SBA processing solely to get SBA s blessing of the franchise agreement. In an attempt to alleviate this problem, SBA established the 3 rd processing alternative a few years ago as a means of allowing lenders to use their delegated authority to process loans when the sole issue requiring SBA s input was the eligibility of the franchise agreement under which the loan applicant was or would be operating. It is important to note that, even when a lender seeks and relies on SBA s affiliation determination, in accordance with SBA regulations, it is the delegated lender who is ultimately responsible for the final franchise eligibility determination. While the creation of the affiliation determination process for delegated loans has allowed more loans to franchise businesses to be processed under lenders delegated authorities, it has the potential to create, and has sometimes created, a bottleneck when the volume of loans on which affiliation determinations are being sought exceeds the limited capacity of SBA s franchise review team. 8 P age

9 NAGGL believe that there are several alternative means by which SBA could improve its franchise eligibility review process, but we most strongly support the first alternative below (a.) The possible alternatives are: a. SBA could establish a franchisor self certification process whereby franchisors would be allowed to certify their compliance with SBA s clearly articulated franchise agreement eligibility requirements. [This recommendation is more fully discussed in response to SBA s questions 6 & 7 below.] b. If SBA does not agree to the establishment of a franchisor self certification process, SBA could return to a franchise eligibility review process similar to the one that was provided for in SOP (c), that is, eliminating the requirement that franchise agreements be approved on a date basis and allowing reliance on a standard, simple, certification from the franchisor of no change, or no material change to the agreement previously found eligible by SBA. [This less desirable alternative recommendation is discussed more fully in response to SBA s question 6 below.] Depending on how they are implemented, either of the processes that NAGGL has listed could require SBA to maintain a list of approved franchise brands or of franchisors that have certified to the eligibility of their agreements. In addition, if SBA decides to continue its agreement byagreement review process, it would be helpful for SBA to maintain a list of those franchise agreements that have been found to be ineligible for SBA assistance. [Our responses to questions 9 11 offer recommendations as to how such list(s) should be maintained.] Finally, any new franchise agreement eligibility process should be included in the SBA ONE system now being designed to the extent appropriate. For example, if SBA adopts NAGGL s preferred option of a franchisor self certification, the system could generate the required certification document as part of mandatory loan closing documentation. Or, if SBA decides to continue its agreement byagreement review process, SBA ONE should provide whatever information would be necessary for lenders to determine whether a franchise (or other) agreement had previously been found eligible or ineligible for SBA loan assistance. (2) Currently, when a small business loan applicant has or will have a franchise, license, dealer, jobber or similar relationship and such relationship (or product, service or trademark covered by such relationship) is critical to the applicant s business operation, SBA requires a review of the agreement and any related documents governing the relationship (or product, service or trademark). Is it sufficiently clear what relationships are required to be reviewed under this standard? NAGGL does not believe that the relationships required to be reviewed under the standards set forth by the SBA are sufficiently clear. The result is that lenders, potential loan applicants and other 9 P age

10 interested parties continue to have difficulty determining which agreements require eligibility determinations. This makes lenders reluctant to lend to borrowers with such relationships. As noted in our background discussion, the statute only requires that to be considered small, a business be an independently owned and operated small businesses that is not dominant in its field. This limited restriction applies equally to business operating under franchise or licensing agreements. Moreover, SBA s existing implementing regulations talk only about franchise and license agreements. But, over time, and particularly in the last seven years, dealer, jobber and similar agreements were added to the list of franchise and license agreements requiring eligibility determinations, as were agreements providing the business with a product, service or trademark critical to the business although no specific criteria has been set forth to clarify what makes a product, service or trademark critical. This makes it difficult if not impossible for lenders to know with certainty if an agreement requires an eligibility determination. Indeed, recently, SBA has expanded this list further without having changed the requirements set forth in SOP by recommending denials of SBA guaranties based on the general provisions of 13 CFR that allow contractual relationships to provide the basis for an affiliation determination, such as 13 CFR (a)(2), which provides that SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists. NAGGL understands that one of the most vexing issues for SBA as it attempts to establish appropriate parameters for defining which agreements it believes it must review, and lenders, as they attempt to understand these parameters, is the fact that the entities making the agreements self define what type of agreement they are creating and there is very little consistency in the way that various business agreements are defined. The sole exception is that the term franchise has been well defined by the Federal Trade Commission (FTC) in the Code of Federal Regulations, Title 16, part 436, DISCLOSURE REQUIREMENTS AND PROHIBITIONS CONCERNING FRANCHISING 1. So, the dilemma that SBA is faced with is deciding when standard business agreements, whatever they are called, contain provisions that could impact the independence of a loan applicant s operations in violation of specific language of the Small Business Act. The example of this phenomenon most frequently cited by SBA is the Best Western agreement with the facilities operating under its banner. Best Western does not define its agreement as a franchise, but its agreements contain essentially the same provisions as franchise agreements, so would meet the test of requiring an eligibility determination. 1 The FTC defines Franchise as follows: Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark; (2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation; and (3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate. 16 CFR 436.1(h). 10 P age

11 So, NAGGL believes that it would be helpful if SBA would provide more clarification and definition regarding those agreements that it believes rise to the level of impacting the independence of operations of a small business loan applicant so that lenders, franchisors, licensors, loan applicants, etc., will have no doubts about the agreements that will require a certification of eligibility by the contracting party, or a full review of the agreement by SBA. To facilitate this process, NAGGL recommends that SBA adopt and cite in its regulations the regulatory FTC definition for franchise referred to above and defined in footnote 1. In addition, in order to provide critically needed clarity, we recommend that SBA also provide a definition for license agreements in its regulations. For example, a license agreement could be defined as an agreement, utilizing the terms licensor and licensee under which a licensor grants to the licensee a limited right to use a name or sell a product in connection with which the licensor will exert or has authority to exert a significant degree of control over the licensee s method of operation, or provide significant assistance in the licensee s method of operation, in exchange for payment by the licensee. The definition should probably be expanded to include any agreement between a motor fuel refiner or distributor and a motor fuel retailer that sets forth the respective motor fuel sale, marketing and/or distribution obligations and responsibilities of such parties. Finally, whether SBA adopts a self certification process, or continues to review agreements on a oneoff basis, NAGGL recommends that SBA s review of agreements be limited to those that fall only under one of the three definitions above and specifically exclude dealer or other contractual agreements that do not rise to the levels established in the definitions above. Whether SBA adopts the proposed franchisor certification process, or continues agreement byagreement reviews, it will be critically important that all parties to the agreement and to the SBA loan fully understand which agreements will be subject to such process or review. Therefore, NAGGL also recommends that SBA amend SBA Form 1919 to facilitate the identification of agreements, other than franchise agreements, that are subject to eligibility determinations. In this regard, we recommend that the questions on the form be made more specific as to the underlying criteria for SBA s determination that an agreement exists that potentially could interfere with the independence of the loan applicant s business operations. Here, we would also note that the form s handling of the issue of whether a loan applicant has affiliates requires that the individual completing the form thoroughly understand the very complex issue of determining eligibility. So, we would also suggest that the form be amended to provide questions that would better walk the applicant through the issues underlying a determination of eligibility. (3) How does SBA s process for determining affiliation (excessive control) of franchisors and franchisees affect small businesses during and upon termination of the franchise agreement? When SBA strictly applies its current franchise eligibility requirements and overly burdensome processes, there likely will be an adverse impact on franchise businesses that seek SBA financing. 11 P age

12 This is because fewer businesses will qualify for SBA loans, and fewer lenders will be willing to risk extending credit to an entity that possibly could be later found to have been ineligible. On the other hand, it is important to note that SBA s imposition of limitations on the terms that a franchisor can impose on a franchisee may also be seen as protecting the rights of the franchisees in that SBA can compel compliance with its requirements that franchisors not place onerous conditions on loan applicants who are seeking SBA financing to support the purchase or growth of a franchise business. This protection actually continues through the life of the franchise (or at least the life of the franchisee s loan) because a franchisor is not allowed to take over the franchisee s operations especially including acquiring the real estate out of which the business operates because SBA has prohibited the franchisor from establishing such requirement. The goal then must be to create requirements and processes that are clear and consistently applied in order for more franchises to gain access to funding critical to its start up and growth phases. (4) Should 13 CFR (i) be modified to specifically address the provisions SBA has determined evidence excessive control by the franchisor? As indicated in response to question 1 above, and question 6 below, NAGGL strongly advocates for an amendment to the existing regulations related to franchise and licensor eligibility. We would suggest that language such as the following be adopted: Affiliation based on franchise and license agreements. A business concern is not affiliated with a franchisor or licensor by provisions of a franchise or license agreement if the franchisee or licensee remains an independently owned and operated business. In determining whether affiliation exists between the franchisor or licensor and the franchisee or licensee based on the franchisor or license agreement, SBA will rely on a certification from the franchisor or licensor that: 1) The Applicant s business is or will be independently owned and operated; 2) The Applicant has or will have the right to profit from its efforts and bears the risk of loss commensurate with ownership; 3) The Applicant s Business and the franchise do not share common ownership or management; and 4) The Agreement does not contain excessive restrictions upon the sale of the franchise interest. Affiliation may arise, however, based on circumstances not related to the franchisor or license agreement as described in 13 CFR However, if SBA decides not to implement the franchisor self certification process that NAGGL recommends, we strongly believes that it will be critically important for SBA to include in its regulations, rather than in SOP, or other documents with lesser gravity, ALL mandates related to franchise agreement eligibility, and to the processes whereby such eligibility is determined. This strategy will help to assure that the requirements are clear to all affected parties lenders, small 12 P age

13 businesses, franchisors, etc. and that changes may only be made after a full vetting via the public comment process. (5) Should 13 CFR (i) be modified to incorporate a reference to Loan Program Requirements, as defined in 13 CFR , because SBA s policies in this area are explained in the Loan Program Requirements, and more particularly in SBA s SOP 50 10? SBA should not expand its regulations by incorporating less formal guidance into them by including reference to its loan program requirements. Instead, as noted in response to question 4 above, the regulations should specifically reflect ALL of the requirements that SBA intends to impose related to the eligibility of franchise, license and jobber agreements. Here it is important to note that lenders already are required to certify their compliance with Loan Program Requirements. For example, the Lender Certification on SBA Form 1920 begins with the following statement: I certify that I have complied and am familiar with SBA Loan Program Requirements... Therefore, adding reference to Loan Program Requirements in the regulation adds no additional clarity or direction for lenders. (6) Should SBA develop a process to accept a certification of non affiliation from a franchisor and/or its counsel, based on standards established by SBA, in lieu of SBA or lender review of the franchise agreement and related documents? As mentioned briefly in response to question 1 above, NAGGL believes the best resolution to the difficult problem of determining the eligibility for an SBA backed loan would be the establishment of a process whereby each franchisor or other contract party with an agreement that would require an eligibility determination would execute a Franchisor Certification and Addendum (to be made into an SBA form). The process, as envisioned by NAGGL, would essentially require that the contract party (e.g., franchisor or licensor) certify that: 13 P age 1) the borrower s business is independently owned and operated; 2) the borrower has the right to profit from its efforts and bears the risk of loss commensurate with ownership; 3) the borrower s business and the franchise do not share common ownership or management; and 4) the agreement does not contain excessive restrictions upon the sale of the franchise interest. However, SBA may choose to add other items that it deems critical to avoid a determination of affiliation in accordance with SBA s requirements. As indicated throughout this document, this approach is NAGGL s preferred alternative.

14 This alternative would completely remove the burden from both SBA and lenders to attempt to determine whether a franchise agreement is or is not eligible. In the case of lenders, this is especially important because they frequently lack the sophistication and knowledge necessary to perform a review of a franchise agreement in accordance with SBA expectations that is to say, a review that identifies all potential impermissible control issues, whether specifically listed as examples in the applicable SOP or extrapolated from specific examples that are listed. This may result in a franchise being deemed ineligible because of the franchisor s ability to exercise such control over the borrower s business that the borrower no longer has the right to profit from its efforts and to bear the risk of loss commensurate with ownership. A franchisor, as the party most familiar with the terms and provisions of its own franchise documents, is in a far better position to identify issues than the lender, has the sophistication to examine SBA s eligibility criteria and respond to requests made in connection with proposed SBA loans, and should have the incentive to assist its existing and potential franchisees to obtain SBA financing so that it can expand its own business. Shifting certification responsibility to the franchisor as was always the case with the previous Certification of No Change or No Material Change process makes the party most likely to know and understand the terms of the franchise documents responsible for certifying compliance with SBA requirements. While lenders would still have to perform appropriate due diligence for purposes of the lender s credit underwriting, the lender would no longer be the party responsible for determining the eligibility of the franchise agreement. NAGGL does not believe that relying on a franchisor s certification would increase SBA s risk in any way since any franchisor who falsely certifies as to the eligibility of its agreement would be subject to applicable federal law as to liability for making false statements; this would expose the franchisor to civil and criminal liability for its false statements. NAGGL also recommends that the franchisor Certification or Certification/Amendment be required on a loan by loan, rather than a global, basis. This strategy would take away the need for SBA to track certifications to assure that they are up to date each time a loan application is submitted for the franchise. While we strongly support the franchisor certification process for determining eligibility, we would point out that if SBA adopts this process, it will need to decide whether such certification will be mandatory, that is, whether any franchisor who is unwilling to certify the eligibility of its agreement would make all businesses operating under the franchise system ineligible for SBA assistance; or whether SBA would retain a process like that now in place whereby it would have to review that franchisor s agreements to determine eligibility. The benefit of making the process mandatory is that SBA would no longer need to devote staff and other limited resources to the agreement review process and it would no longer need to maintain a registry like listing of eligible agreements. We would note, however, that SBA would have to address other issues related to the enforceability of the agreement as between the franchisor and SBA and/or between the franchisor and the small business applicant/borrower in the event that the franchisor violates any of the provisions of its 14 P age

15 certification. Based on a conversation that NAGGL had with SBA s Office of the Inspector General regarding prior Agency practice, NAGGL believes that, as long as the standard penalties for perjury provisions are included in the certification form, any franchisor that executes the certification would be subject to criminal or civil penalties as provided by law. A sample form for a Franchisor Certification and Addendum that reflects the simplified eligibility determination contemplated by these comments is attached hereto as Exhibit A. NAGGL recommends that this version of franchisor self certification be adopted for use by SBA, particularly if SBA adopts NAGGL s recommended regulatory amendment. As an alternative, attached as Exhibit B is a more detailed Franchisor Certification and Addendum form. The Exhibit B version may be more appropriate if SBA does not make the suggested regulatory change, but does establish a process that allows for a franchisor to self certify as to the eligibility of its agreement. This version includes a more extensive list of issues than the Exhibit A form. If this version is adopted, SBA will need to assure that the provisions that are deemed fatal to concluding that an agreement is eligible mirror the items that SBA determines are critical to such determinations and which are included in regulations. NAGGL strongly believes that the recommended franchisor self certification process offers the best solution for resolving the issues related to determining franchise eligibility. However, if SBA does not adopt this recommendation, but decides to continue to require agreement by agreement determinations of franchise eligibility, NAGGL recommends returning to a process similar to that set forth in SOP (C), i.e., eliminating the requirement that franchise agreements be approved on a date basis and allowing lenders to obtain a standard, simple certification of no change or no material change, as certified by the franchisor. While this process would be somewhat simpler for lenders than the current process, it still would require SBA to devote considerable resources to maintaining a franchise eligibility review function, and to maintain a registry like listing showing the results of the Agency s review of individual franchise agreements and their subsequent certifications of no/no material change. (7) If so, should that process be available only with respect to renewal requests i.e., only for franchisors that have had franchise agreements reviewed and approved by SBA in a prior year? As indicated in responses to questions 1 & 6 above, NAGGL strongly believes that a franchisor s certification should be allowed for all eligibility determinations, not merely those where SBA has already reviewed a franchise agreement and found it to be eligible. As previously discussed, the franchisor is the party most familiar with the terms and provisions of its own franchise documents, and so is in the best position to identify potential eligibility issues, has the sophistication to review and respond to requests made in connection with proposed SBA loans, and should have the incentive to assist its existing and potential franchisees to obtain SBA financing so that it can expand its own business. Allowing such a Franchisor Certification and Addendum to be used in connection 15 P age

16 with all eligibility determinations would facilitate the making of SBA loans to franchise businesses and further SBA s mission of making funds available to small businesses. However, if SBA decides to continue some form of an agreement by agreement eligibility review, NAGGL strongly recommends that once SBA has approved a franchise s Agreement, it allow the franchisor to certify as to the continuing eligibility of its agreement for purposes of SBA financing. 8) If an applicant is not a franchisee but has an affiliate that is a franchisee, should SBA continue to review the affiliate s franchise agreement and related documents as part of the small business size determination of the applicant? Historically, the SBA did not review the franchise agreements of affiliates for eligibility as there is no requirement that an affiliate franchise that is not receiving an SBA small business loan must be eligible with respect to such loan as if it were a franchise borrower. Unfortunately, although there is no necessity for such reviews, in recent years the SBA has expanded its eligibility requirements to include franchises owned by affiliates that are not borrowers. Thus, if the owner of an applicant business has an interest in a separate business that happens to be a franchise, SBA now requires an eligibility determination for the affiliate s franchise even if it is completely separate from and unrelated to the business that is obtaining the SBA loan, and is not obtaining the benefits of the loan. For example, if John Smith is obtaining an SBA loan for his independent book store, and he also owns 50% of a Subway sandwich shop, currently SBA requires that the agreement under which the Subway franchise is operating be eligible for an SBA loan even if John Smith s guaranty will not be secured by his interest in the franchise. It makes sense to consider the size of all affiliates, including, in our example, the Subway store, when determining whether the applicant business is small. It does not make sense, however, to require the affiliate franchise to meet the SBA s franchise eligibility requirements, including a determination of whether the separate business has the right to profit from its efforts and bears the risk of loss commensurate with ownership (a point seemingly irrelevant to the subject loan to a separate an unrelated business). The current process therefore seems to be an unnecessary expansion of the SBA s franchise requirements that is not required by the Small Business Act or SBA s regulations and makes it even more difficult for lenders to make SBA loans. As there is no necessity for such a review, the SBA should discontinue this practice. (9) Should SBA continue to list agreements on a central registry and, if so, where should that registry be maintained and by whom? The response to this question will depend on the nature of the franchise eligibility review process that SBA ultimately establishes. However, if the process that is established requires the maintenance of a list of eligible franchises, NAGGL strongly recommends that either SBA maintain the list itself, or that the any vendor provided registry process be returned to its original structure. 16 P age

17 When the Franchise Registry process was first designed, responsibility for maintaining the list of eligible franchise agreements was established via a no cost contract between the vendor and SBA (with revenues coming to the vendor from payments made by franchisors to have their entities listed on the Registry). However, at some point, SBA apparently decided that that a contract was not necessary, so today the Registry continues to be maintained by the original vendor operating on a quasi SBA sanctioned basis (i.e., specific reference in SOP, joint SBA vendor presentations, etc.) without SBA having any of the safeguards afforded by having a contractual relationship with the vendor. The result is that the Registry frequently represents itself to lenders, franchisors, etc. as the decider of franchise eligibility even though that function is inherently governmental and should not be delegated to a vendor. NAGGL believes that if a registry type system is to be continued, the vendor who will maintain the list of eligible franchise agreements should be selected by a competitive procurement process with the no cost contract being re procured periodically as required by Federal Acquisition Regulations and government procurement practices. We also believe that the scope of any such contract should include only the custodial and ministerial functions of maintaining and providing access to for lenders AND potential loan applicants of a list of those franchise agreements that have been found by SBA to be eligible SBA loan purposes. The contractor should not make decisions regarding eligibility, and SBA, not the vendor, should be the entity with whom the franchisors negotiate when issues of eligibility need to be resolved. In addition, we believe that if vendor process is to be maintained, any list of approved franchise agreements must be fully available to all interested parties, including potential franchisees who are trying to learn about possible financing options, lenders, and other interested parties. This would be a reversal of current policy where only registered users are permitted access to the detailed information on the Registry with potential franchisees apparently specifically excluded from having such access. In the alternative, SBA could consider maintaining its own list of eligible franchise agreements, with that list being made available via the SBA Website as is done currently. However, as noted to our response to question 10 below, NAGGL understands that moving responsibility for maintenance of a registry type list to the Agency, without providing the necessary authority for SBA to charge for the service of approving and listing franchises, could tax the limited personnel and other resources available for this function. Under either scenario, if a franchise list is to be maintained, SBA must decide who should have authority for the list and any vendor relationship the Office of General Counsel, as currently structured or the Office of Capital Access (OCA). We believe that a valid argument can be made for giving the authority for this function to OCA since it is that office that has authority for all other aspects of loan eligibility. 17 P age

18 In addition, if a listing process is to continue, it is critically important that any list/ registry be one on which lenders may fully rely as addressing ALL aspects of eligibility, including the technical eligibility of the agreement as well as any other issues, such as the business operations model that could impact eligibility for 7(a) loans. (10) If there is a cost associated with the maintenance of the registry, who should bear that cost? Should there be a charge for listing of agreements on a registry and, if so, who should bear the cost for such listing? SBA notes that there are statutory limitations on SBA s current authority to charge, retain and use fees. As noted throughout these recommendations, we believe that the current Franchise Registry system should be eliminated. However, if SBA decides to leave in place any process that would require a registry like listing of approved agreements, given the budgetary constraints under which Agency operates, NAGGL believes that it will be necessary for this process to continue to be funded by payments made by the franchisors. We understand that this source of funding may necessitate the use of an outside third party to maintain any listing of eligible and ineligible franchises. (11) In light of the fact that SBA lists approved franchises on its website, is there a need to continue to post the Franchise Findings List as well? The Franchise Findings List which is assembled by SBA attorneys shows eligibility issues that the attorneys have identified in various franchise/license/dealer/jobber or similar agreements that could cause a business operating under a listed agreements to be ineligible for SBA Financial Assistance. The list is described as being only a guide, and lenders are cautioned not to rely on it as a substitute for a full review of the agreement. NAGGL believes that the Franchise Findings List, as it currently exists, should be eliminated. The current list provides little useful information and lenders generally find the information contained on it to be confusing and incomplete. In addition, historically, the list has not been kept up to date, so lenders cannot be comfortable relying on the information that it contains. A major problem with the current Franchise Findings List is that many lenders mistakenly believe that if a franchise is shown on the list as having a problematic agreement, it is not eligible, or conversely, that if a franchise is not listed, it is eligible. Neither assumption is always true. In some cases, after the date the list was prepared, SBA may have negotiated a fix with a franchise that is shown on the list as having a potentially adverse finding. In other cases, the agreement under which the loan applicant will be operating is not the same one that SBA found to be problematic. Similarly, the absence of a franchise from the list does not mean that it is eligible for SBA financing, since it is possible that a potential problem may have been identified after the list was prepared. In addition, sometimes a franchise agreement has been found to be eligible, but the operating structure under which its franchisees operate has been found to be ineligible. [Examples of that situation can be found in one or more of the salon suite franchises where the agreements were not found to be 18 Page

19 objectionable to SBA, but the business structure was found to be that of a landlord/tenant (passive) and thus ineligible for SBA financing. While NAGGL is recommending that the current Franchise Findings List be eliminated, we do believe that it could be helpful to lenders and to potential franchise business loan applicants if SBA were to publish a list of all franchises that SBA has found ineligible for assistance under the 7(a) program. The nature of this list will depending on the process that SBA establishes for purposes of vetting franchise eligibility. If SBA decides not to establish a franchisor certification process, and retains its current agreement by agreement review process, this list should include those franchisors with franchise agreements that SBA has found to contain provisions that it deems create issues of affiliation or excessive control, as well as those franchise business models that have been found ineligible for SBA because they are passive businesses or because of other ineligible structures. (12) Should the franchise agreement review process be streamlined and/or simplified and, if so, in what way? NAGGL s responses to previous questions fully respond to this question. (13) Should the franchise appeal process be changed and, if so, in what way? Currently, per SOP (G), page 84, a lender may appeal an SBA franchise decision that the lender believes is inconsistent with [the] SOP to SBA s Franchisee Committee which is comprised of OGC attorneys appointed by the Associate General Counsel for Financial Law and Lender Oversight (AGC) with the Director, Office of Financial Assistance or designee servicing as an ex officio member of the committee and the AGC having the right to overrule decisions rendered by the committee. In addition, also per the cited SOP, a franchisor may appeal SBA s decision not to place it on the Registry by following the same procedures. Finally, per SBA s general regulations regarding appeals of formal size determinations, 13 CFR , such appeals are handled by SBA s Office of Hearings and Appeals (OHA). We believe that if SBA creates a franchisor certification system such as that being recommended by NAGGL, there would no longer be a need for appeals by lenders or franchisors. However, if SBA continues to require an agreement by agreement determination of franchise eligibility, NAGGL recommends that the process for a lender to appeal a franchise eligibility decision that it believes is inconsistent with the SOP mirror the current process under which all other appeals related to a loan applications are handled. That, is that such appeals be made in accordance with 13 CFR and SOP (G) with initial appeals being submitted to SBA s loan processing center, and 2 nd level appeals being decided by the Director, Office of Financial Assistance, with consultation with the Office of General Counsel, as appropriate. 19 P age

20 Also, and again only if SBA continues to require an agreement by agreement determination of franchise eligibility, NAGGL recommends that a franchisor who wishes to appeal SBA s decision not to place a franchise on the Franchise Registry (or whatever alternate system SBA may develop), make such appeal to the Associate Administrator of Capital Access (AA/CA), or designee. We recommend that the AA/CA have final authority to make such decisions, but that such decisions require input from the Office of General Counsel representative who was responsible for the decision not to find the franchise agreement eligible. The process should allow for appeal of the AA/CA decision to OHA in the same way that formal size determinations are now appealed. We also recommend that OHA retain jurisdiction for deciding formal size appeals, consistent with the process used for all SBA programs. 20 P age

21 Exhibit A FRANCHISOR CERTIFICATION AND ADDENDUM As an authorized representative of [Franchisor/ Licensor name], I certify as follows: 1. [the Applicant] is or is expected to become the holder of a [Franchise/License name] franchise/license pursuant to a written agreement ( Agreement ). 2. The Applicant s business is or will be independently owned and operated. 3. The Applicant has or will have the right to profit from its efforts and bears the risk of loss commensurate with ownership 4. The Applicant s Business and the franchise/license do not share common ownership or management. 5. The Agreement does not contain excessive restrictions upon the sale of the franchise/ license interest. 6. This Franchisor Certification and Addendum modifies the Agreement to ensure compliance with the Small Business Act and the Code of Federal Regulations. I understand that 18 U.S.C and 15 U.S.C. 645 provide that falsifying information or providing false statements in connection with a government guaranteed loan may subject the undersigned to certain civil and criminal penalties. [Franchisor/Licensor name]: BY: Print Name: Title: JOINDER The undersigned Applicant hereby agrees to be bound by the terms and provisions of this Addendum and Certification, and agrees that the Agreement is modified hereby to the extent set forth herein. APPLICANT: BY: Print Name: 21 P age Title:

22 Exhibit B FRANCHISOR CERTIFICATION AND ADDENDUM THIS ADDENDUM AND CERTIFICATION ( Addendum ) is made and entered into on, 20, by, having as its business address ( Certifying Party ). RECITALS A. The United States Small Business Administration ( SBA ) was established to aid, assist and protect, insofar as possible, the interests of small business concerns. B. ( Applicant ) has requested a loan from ( Lender ), which funding is to be provided with the assistance of the SBA (the Loan ). 22 P age C. Certifying Party and Applicant entered into that certain dated, (together with all attachments, exhibits, schedules, guaranties, certifications, instruments and related documents, the Agreement ). The Agreement governs or affects the operation of Applicant s business (the Business ). D. Applicant has requested a loan from ( Lender ), which funding is to be provided with the assistance of SBA (the Loan ). E. Certifying Party and Applicant acknowledge that, in order to be eligible for SBA-guaranteed financing, the Agreement may not allow the Certifying Party such control over Applicant or the franchise that Applicant does not have the independent right to both profit from its efforts and bear the risk of loss commensurate with ownership. NOW, THEREFORE, in consideration of the mutual promises below, and for good and valuable consideration, the receipt and sufficiency of which the parties acknowledge, Certifying Party certifies and agrees as follows: 1) The Agreement is in full force and effect, and Certifying Party has sent no notice of default or breach to Applicant under the Agreement that remains uncured on the date hereof. 2) Under the Agreement, as modified by this Addendum, Certifying Party does not control Applicant, directly or through an agent. Applicant has the independent right to profit from its efforts and bear the risk of loss commensurate with ownership, including but not limited to the following: a) Applicant has control of the Business money and accounts and controls all deposits and withdrawals, billing activities, and payment of any fees, debts, and expenses.

23 b) Applicant manages the daily operations, and controls, hires, and fires employees. If the Certifying Party has the right to step into and operate the business under the terms of the Agreement and exercises such right Certifying Party will operate the business for an initial 90 day period of time and the Certifying Party will periodically discuss the status with the Applicant or his/her/its heirs, assigns or personal representatives and Lender. (Certifying Party may extend the operation for a maximum of 12 months, inclusive of the initial 90 day step-in period referred to above). c) Applicant has the right to transfer its interest in the Business to a qualified third party transferee. Certifying Party s prior written consent to such a transfer will not be unreasonably withheld or delayed. d) Certifying Party does not control the sale price or appraisal method for any sale or transfer. The price of any sale or transfer of the Business, or Business assets, under the Agreement will be based on the fair market value of the business and/or assets. The fair market value will be determined by a method agreed to by both the Applicant and Certifying Party. If the parties cannot agree and the fair market value is to be determined by an appraisal, the Certifying Party and Applicant must jointly select an independent appraiser. e) Any right of first refusal granted to or reserved by Certifying Party provides for or will be subject to matching offer terms and price. f) Certifying Party will only exercise any right of first refusal for the sale or transfer of 100% of the Business and assets. The right of first refusal may not be exercised for any sale or transfer of a partial interest in the Business. g) Certifying Party will not exercise any post-termination right to require the Applicant to sell or lease to Certifying Party the real estate where the Business is located. h) Applicant shall have the right to participate in the choice of any third party arbitrator and/or mediator. i) Applicant shall not be required to guarantee performance of an approved transferee. j) To the extent that the Agreement or any other document Applicant has signed or will be required by Certifying Party to sign in connection with the Business contains any provision that may have the effect of allowing the Certifying Party to exercise control of Applicant or the Business in a way that prevents Applicant from having the independent right to profit from its efforts or bear the risk of loss, such provisions are hereby nullified and have no force or effect. Certifying Party and Applicant agree that, to the extent that the terms and provisions set forth in paragraphs 2(a) through 2(j) above conflict or are otherwise inconsistent with the terms and provisions of the Agreement, the terms and provisions set forth herein shall be controlling and shall superseded any contradictory provision set forth in the Agreement. 3) If Applicant s business is a gas station, Certifying Party further certifies and agrees as follows: a) Certifying Party will not exercise any purchase or repurchase option that allows Certifying Party to acquire Applicant s primary business asset (e.g., real estate) if Applicant violates a condition, 23 P age

24 covenant, restriction or other provision of the Agreement. Certifying Party may exercise any right of first refusal that allows Certifying Party to match a third party s offer. b) The Agreement contains no provisions that impose requirements, restrictions or consequences that could significantly impair the collateral value and marketability of the real property or the Applicant s repayment ability, such as (i) deed restrictions, covenants, easements, reversionary interests, or any other provision that restricts the use of the real property for the benefit of Certifying Party or any other person or entity, such as those that restrict the brand of fuel that may be sold on the real property or that require subsequent owners of the real property to indemnity any oil company or other person or entity, or (ii) provisions requiring engineering controls that require the Applicant or subsequent owners to install costly devises or structures, such as extraction wells or subsurface barrier walls, before constructing a building, remodeling, or otherwise improving the real property. c) The Agreement contains no provisions that alter SBA s or Lender s legal rights, remedies or responsibilities, or impose additional duties on SBA or Lender, such as provisions requiring SBA or Lender to (i) release or waive their legal rights, remedies or claims against Certifying Party, an oil company or any other person or entity, (ii) subordinate SBA s or Lender s lien(s), (iii) indemnify Certifying Party, an oil company or any other person or entity, (iv) provide Certifying Party, an oil company or any other person or entity with special notice of default or foreclosure, or (v) provide Certifying Party, any oil company or any other person or entity with an exclusive period of time in which to decide what action to take before SBA or Lender can initiate liquidation activities in the event of default on the Loan. Certifying Party and Applicant agree that, if Applicant s business is a gas station, to the extent that the terms and provisions set forth in paragraphs 3(a) through 3(j) above conflict or are otherwise inconsistent with the terms and provisions of the Agreement, the terms and provisions set forth herein shall be controlling and shall superseded any contradictory provision set forth in the Agreement. 4) By signing this Addendum, Certifying Party and Applicant, and each of them, hereby verify and affirm that they have been advised by Lender to seek and obtain the advice of legal counsel of their own choosing prior to executing this Addendum, and that they have had the opportunity to obtain such advice prior to executing this Addendum. 5) Certifying Party and Applicant, and each of them, further verify and affirm their understanding that they are free to seek and obtain legal advice and counsel of their own choosing with regard to any loan that Lender may make to Applicant, as well as any agreements and other documents executed by Certifying Party and/or Applicant in the context of such loans, or in anticipation of such loans, including, but not limited to, this Addendum. 6) Certifying Party and Applicant, and each of them, further verify and affirm their understanding that they are under no obligation to agree to or accept this Addendum or any proposed revisions to the Agreement communicated by Lender, and that, similarly, Lender is under no obligation to agree to or accept any revisions to the Agreement proposed by Certifying Party and/or Applicant or to approve, make or fund any loan to Applicant. 7) Certifying Party and Applicant acknowledge and agree that: 24 P age

25 a) They have each carefully read this Addendum and warrant and represent that they have each relied upon their own judgment regarding the terms and provisions of this Addendum; b) They are voluntarily entering into this Addendum with full knowledge of its contents; c) The Lender and SBA are relying upon the above declarations, affirmations, representations and warranties in their decisions on whether to approve the Loan, and that without these affirmations, declarations, representations and warranties the Lender and SBA would not consider making the Loan to the Applicant. 8) This Addendum automatically terminates on the earliest to occur of the following: (i) termination of the Agreement; (ii) payment in full of the Loan; or (iii) SBA no longer has any interest in the Loan. 9) Notwithstanding any provision herein to the contrary, in no event shall the execution of this Addendum or the performance of the terms and provisions hereof obligate the Lender to approve, make or fund any loan, including the Loan, to Applicant, and in no event shall any such loan be made unless and until all requirements and conditions of the Lender and/or the SBA thereto shall have been satisfied in the Lender s sole and absolute discretion. 10) Miscellaneous a) Third-Party Beneficiaries. Lender and the SBA are intended to be third party beneficiaries of this Addendum. b) Construction. The parties hereto have participated jointly in the negotiation and drafting of this Addendum. In the event an ambiguity or question of intent or interpretation arises, this Addendum shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Addendum. c) Headings. The headings and subheadings contained in this Addendum are inserted for the convenience of the parties only and shall not affect in any way the meaning or interpretation of this Addendum. d) Binding Nature of Addendum. This Addendum shall be binding upon and inure to the benefit of the Certifying Party, Applicant, their respective affiliates, heirs, legal representatives, successors, successors-in-interest, receivers, administrators, trustees, and permitted assigns and assignees. e) Amendment and Waiver in Writing. No provision in this Addendum may be amended, modified or waived, except by a statement in writing signed by the party against which enforcement of the amendment, modification or waiver is sought stating that the Addendum is to be modified, is to be waived, or is to be amended. f) Authority. Each of the parties warrants and represents to all of the other parties that, where applicable: (a) he, she or it has full power and authority to enter into this Addendum; (b) no third party approvals are necessary for him, her or it to lawfully enter into this Addendum; (c) the execution of this Addendum will not violate any material agreement or court order binding on said party; (d) execution of this Addendum is binding on and enforceable against said party; (e) each of the persons executing this Addendum on behalf of an entity is fully authorized to execute this 25 P age

26 Addendum on behalf of such entity; [and (f) each of the persons executing this Addendum on behalf of Certifying Party and Applicant is fully authorized to execute general releases on behalf of each such corporate party upon the terms and conditions set forth herein]. g) No Duress. The parties, and each of them, agree that they are executing and entering into this Addendum pursuant to their own free will and not due to any form of duress, economic or otherwise. h) Counterparts. This Addendum may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. This Addendum may be executed by facsimile signature, ed portable document format ( PDF ) signature, or original signature. Any facsimile signature or ed PDF signature shall be deemed an original and have the same effect as an original for all purposes. The undersigned understands that 18 U.S.C and 15 U.S.C. 645 provide that falsifying information or providing false statements in connection with a government guaranteed loan may subject the undersigned to certain civil and criminal penalties. IN WITNESS WHEREOF, the Certifying Party has duly signed and executed this Addendum as of the day and year first above written. CERTIFYING PARTY: BY: Print Name: Title: JOINDER The undersigned Applicant hereby agrees to be bound by the terms and provisions of this Addendum and Certification, and agrees that the Agreement is modified hereby to the extent set forth herein. APPLICANT: BY: Print Name: Title: 26 Page