Does a management agreement make a business ineligible?
Short answer
It does if the manager has sole discretion over operations. The business is then an ineligible passive business. It can qualify if it keeps meaningful oversight of budgets, large spending, bank accounts and employees. Source: SOP 50 10 8.1, Sec. A, Ch. 1, Para. E.3.
It can. A management agreement giving the manager sole discretion over operations creates an ineligible passive business. That is SOP 50 10 8.1, Sec. A, Ch. 1, Para. E.3.
What keeps you eligible
You stay eligible if the manager lacks sole discretion and you exercise meaningful oversight. The agreement must provide that you do all of the following:
- Approve the annual operating budget.
- Approve capital expenditures or operating expenses over a significant dollar threshold.
- Control the bank accounts.
- Oversee the employees running the business, who must be your employees.
Lender review and franchises
Lenders must review these agreements on delegated and non-delegated loans alike. The exception is a management agreement that is part of the franchise disclosure documents for a brand on SBA's Franchise Directory.
If a franchisee's management company is, or is affiliated with, the franchisor, the applicant is not eligible (Sec. A, Ch. 1, Para. G).
Side agreements
An agreement for control, including a side agreement, that gives a non-guarantor owner or investor control of the business makes it ineligible (Para. E.3).
Guaranties
A lender may also require a guaranty from a company managing daily operations, even with no ownership. See Sec. A, Ch. 5, Para. A.
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