Can a master franchisee or area developer get an SBA loan?
Short answer
A master franchisee cannot. Its income comes from royalties on units others operate, which SBA treats as passive. A franchisee with area development rights to open units it owns can qualify if it and its affiliates are small. Source: SOP 50 10 8.1, Sec. A, Ch. 1, Para. G.
It depends on who will own the units. SOP 50 10 8.1, Sec. A, Ch. 1, Para. G separates two deals that sound alike.
Franchise Development Agreement
A Franchise Development Agreement, also called a Master Franchise Agreement, gives the developer a territory. Other franchisees own and operate the units, and the developer earns royalties from them. SBA has determined these agreements are passive. An applicant operating under one is not eligible.
Area development rights
A franchise agreement can instead give you the right to develop more units that you or your affiliates own and operate in a territory. The SOP also calls this a Multi-Unit Franchise Agreement. You may be eligible, as long as you and your affiliate units are small.
If an affiliate holds the master rights
A franchisee may still qualify if an affiliate operates under an ineligible Franchise Development Agreement. The applicant and its affiliates must be small, and no proceeds can benefit the ineligible affiliate.
Franchisors
A franchisor can apply too. Its brand must be on the Directory, even if it will not sign a franchise agreement in the deal. The franchisor must meet size standards on its own, without combining its franchisees.
Size and affiliates
Units you own more than 50% of in the same 3-digit NAICSThe federal code system that sorts businesses by industry. subsector are affiliates under 13 CFR § 121.301(f).
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