Revised SBA Franchise Agreement Addendum

Earlier this year, the Small Business Administration (“SBA”) rolled out a standard form of SBA Addendum to Franchise Agreement for use by franchisors and lenders in making SBA guaranteed loans to franchisees. In lieu of the SBA Addendum to Franchise Agreement, franchisors are permitted to use a prior addendum that was negotiated by the franchisor and the SBA in connection with either a 2015 or 2016 version of the franchisor’s franchise agreement known as an SBA Negotiated Addendum. Use of the SBA Negotiated Addendum requires the franchisor to certify that the terms of its current franchise agreement, especially those relating to affiliation, have not changed from its 2015 or 2016 franchise agreement.

The SBA Addendum to Franchise Agreement is designed to modify the following provisions in a typical franchise agreement:

 

Change of Ownership.

A franchisor may only exercise a right of first refusal only if the proposed transferee is not a current owner or family member of a current owner.  Also, franchisor may not unreasonably withhold its consent to a proposed transfer. Finally in the event of a transfer, the transferor will not be liable for the acitions of the transferee franchisee.

Forced Sale of Assets.

In the event of a required sale of the business or personal assets upon termination of the franchise agreement, the value will be determined by an appraiser chosen by franchisor and franchisee. Franchisee is not required to sell any owned real estate but may be required to lease the real estate for the remainder of the franchise term for fair market value.

Covenants.

If the franchisee owns the real estate where the franchise is operating, the franchisor may not record any covenents restricting the use of the property.

Employment.

Franchisor may not hire, fire, schedule or directly control franchisee’s employees. Any temporary employees must be employeed by the franchisee and not the franchisor.

 

 

NASAA Releases Commentary Addressing Financial Performance Representations

Though not a required disclosure, approximately half of all franchisors now provide Item 19 Financial Performance Representations (FPR’s) in their Franchise Disclosure Documents (FDD). On May 08, 2017, the North American Securities Administrators Association (NASAA) adopted additional commentary designed to clarify certain address issues relating to Item 19 Financial Performance Representations. Among the issues the FPR commentary is designed to address includes:

  1. General guidance as to how important terms like Gross Sales and Net Profit are calculated when part of a franchisor’s FPR;
  2.  How and when data may be disclosed based on company-owned, franchisee and managed outlet operations;
  3. Disclosure of sub-set data including best performing units;
  4. Requirements for disclosure of averages and medians;
  5. Use of forecasts; and
  6. Guidelines for required disclaimers.

The FPR Commentary is to become effective 180 days after adoption by NASAA or 120 days after a franchisor’s next fiscal year end for franchisors having an effective FDD as of the date of adoption.