Note: This post is a snippet of our 2018 Top 100 Global Franchises report. The entire report can be viewed here.
The confusion over franchise joint employment has also had a significant impact on financing, more specifically franchising involving the Small Business Administration (SBA). The agency offers guarantees to banks that participate in its programs for the loans they grant.
In searching for financing options, franchisees will likely come across franchises that state they are “SBA approved” or something to that effect. During the loan application process, lenders have to vet the person they’re giving their money to, as well as the business system they want to run. In a franchise situation, that means vetting the franchisee and franchise system itself. Franchises that are SBA approved have pre-vetted themselves for future loan applications related to their franchise.
As a result, the SBA loan process is streamlined for the franchisee – not entirely avoided. The potential franchisee still has to prove that he or she is a good candidate for the loan. It’s similar to TSA Pre-check at an airport. Travelers with TSA Pre-check still have to go through security, but since they’ve already registered with the appropriate authorities they don’t have to spend as much time going through the security line as everyday travelers.
Up until January 1, 2018, in order to streamline the vetting process franchisors would add an amendment to their franchise agreements and have their franchise listed on the Franchise Registry of third-party vendor FranData. Now, the SBA is bringing the list in-house.
The change is largely spurred by the SBA’s mandate to guarantee loans for independent small businesses only. The debate over joint employment forced the SBA to review its polices pertaining to franchises and determine if franchisors are retaining too much control, often referred to as affiliation, over their franchisees for each franchisee to be considered an independent business owner.
To be a part of the SBA’s Franchise Directory, franchisors will now have to use the SBA’s standard addendum or use their own addendum. The addendum binds franchises to criteria that ensure franchisees will have dominion over their own businesses. Franchises using their own addendum must submit their addendum each year to show the terms of affiliation within their franchise agreements are unchanged from the previous year.
The items covered by the SBA’s addendum include: events of transfer, forced sale of assets, real estate covenants, and employment of the franchise unit. Just under 75% of the Top 100 franchises (72) have fulfilled the requirements of the SBA for the Franchise Directory as of the beginning of 2018. It should be noted of the 28 that aren’t listed on the Directory, 11 are primarily based outside of the U.S.