Franchise Operations

SBA Reviews Franchise Loan Guidelines

BossThere has been quite a bit of controversy recently around the question of whether franchisees are big businesses or small ones. Much of the debate has centered around the question of whether franchisees have to follow laws about employees as though they were multimillion dollar corporations, as some franchisors are, or as though they were small, mom and pop business, as franchisees often are.

Definitions of the borderline between big and small businesses vary from one jurisdiction to another, and from one conversation to another, but small businesses are often defined as those that have revenues under one million dollars, or those that have fewer than 50 workers, or with some other set of clear-cut numbers.

When it comes to franchisees, it’s not so clear cut. A Subway location with five workers seems to be as much a small business as the independent sandwich shop next door which also has five workers. The question is, does the size of the whole Subway franchise mean that the small sandwich shop isn’t really a small business, but is rather a small part of a big business?

The question is coming up in a new context: SBA loans. The Small Business Administration is, naturally, for small businesses. SBA guaranteed loans are a major source of start up capital for franchisees, and some of the groups that are fighting to define all franchisees as big business want to cut franchises out of the SBA.

While the minimum wage question has dealt primarily with fast food franchises, the SBA question has the potential to affect franchise businesses across the board. The arguments are the same:

Franchisees are small businesses:

  • Franchisees control the day to day business at their locations.
  • Their own money is at risk.
  • They set their own wages, do their own hiring, and manage their employees.
  • Franchisees pay for the benefits they gain from franchisors.
  • Franchisees’ positions and daily activities are more like entrepreneurs than like corporate employees.

Franchisees are big businesses:

  • The franchisor corporation is often very large.
  • Franchisees follow rules, often very specific in nature.
  • Franchisors may train franchisees’ employees and may set criteria for success.
  • Franchisees gain advantages from their connection to the franchisor.
  • Franchisors treat franchise locations much as they do corporate-owned locations.

Until now, the SBA has not considered things like quality standards, standard operating procedures, or accounting structures in its decision on whether or not a franchisee should be considered a small business. The SBA says, “franchisors and franchisees should not be considered ‘affiliated’ simply by virtue of the contractual rights and obligations to which they agree to in their franchise contracts.”

Since the SBA is not allowed to guarantee loans to big businesses, the SBA must determine whether changes in the understanding of the franchisor-franchisee relationship have changed the standards they should use in making their decisions. They have asked for input on the questions as they develop clear rules for these determinations. Some franchise groups, as well as the national Chambers of Commerce, have already weighed in.

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