As discussed previously in this blog series, the Small Business Administration (SBA) promulgates rules on the size standards under which businesses may qualify as “small.” Your business must meet the relevant size standards (i.e., according to the NAICS code for your industry) if you’d like to qualify for certain business development programs or certifications such as DBE, WOSB, EDWOSB, VOSB, SDVOSB or other SBA programs.

So far, we have explained SBA Affiliation arising from:

• Stock ownership;
• Stock Options, Convertible Securities, and Agreements to Merge; and
• Common management
• Identity of Interest
• The Newly Organized Concern Rule
• Joint Ventures

Under 13 CFR § 121.103(i), the SBA will generally not find affiliation between a franchisee or licensee and its franchisor or licensor based on the existence of a franchise or license agreement where the restrictions are related to standardized quality, advertising, accounting format, or similar provisions. Affiliation will be found if the franchise or license agreement places restraints on the franchisee or licensee from retaining profits, bearing risks for losses, or places excessive restriction on the ability to sell franchise interests. 

In considering franchise agreements, the SBA has affirmed that a requirement of written consent from a franchisor to transfer ownership interests does not rise to the level of an excessive restriction. Size Appeal of: Emergency Pest Control, Inc., SBA No. SIZ-5797, 2016 (December 13, 2016). An excessive restriction could instead be an agreement that allowed a franchisor to unreasonably withhold consent for a franchisee to transfer its ownership interests.

An indemnification clause within a franchise or license agreement may raise a question for finding of affiliation between a franchisor and franchisee. However, consider this example, where the SBA clarifies that indemnification clauses which insulate the franchisor from legal liability associated with the franchisee’s operations would not create affiliation because it did not restrict the franchisee’s ability to make a profit or suffer a loss. Size Appeal of: Gulf-Shred, Inc., DBA Shred-It Mobile/Biloxi, SBA No. SIZ-5149 (August 9, 2010).

A failure to find affiliation based on a franchise or license agreement does not preclude a finding of affiliation through other provisions of 13 CFR § 121.103, such as common management, common ownership, economic dependence, or the ostensible subcontractor rule.

Note that the SBA previously maintained an SBA Franchise Directory which lists brands that it has reviewed for affiliation and eligibility for the SBA 7(a) Loan Program. However, as of May 11, 2023, the SBA no longer supports or maintains the Franchise Directory. 

SMGG thanks summer associate Krystel G. Becker for her assistance with writing this blog.

This blog is the final installment in a series that explains how the SBA determines affiliation under 13 CFR § 121.103.