In the SBA`s revisions to its membership rules, which came into force on July 27, 2016, the SBA formulated the specific membership rules for its credit programs in 13 CFR § 121.301 (f). A clarification contained in that rule change concerned affiliation on the basis of joint management between two small undertakings. Much of the rule remained unchanged, confirming that companies that were under common management or whose management was under common control were affiliated companies. The SBA then added: "Affiliation also occurs when a single person, group or entity controls the administration of the applicant group by means of an administrative agreement." 13 CFR § 121.301(f)(3). Commenting on the new rule, the SBA noted that "details of the types of management agreements that lead to affiliation findings will be included in the requirements of the loan program." If a potential loan involves a management agreement, lenders processing loans under their delegated authority must (i) receive a copy of the administrative agreement, (ii) conduct an affiliate analysis in accordance with 13 C.F.R. § 121.301 (f) (3), and (iii) keep a copy of the agreement and a detailed affiliate analysis in the credit file. Non-delegated lenders must provide cap with a copy of the administrative arrangement with their request for review by the Centre`s BSO staff. SBA franchise consultants do not review management agreements and these agreements will not appear in the SBA franchise directory. If an applicant has a management contract and the company is considered an active company, affiliation may occur if the management company has sole discretion over the company with minimal oversight of the applicant`s management decisions. In such cases, creditors should confirm that the applicant, the management company and all related undertakings together meet the size standard applicable to the sector concerned. If an applicant has a management contract and the management company has the sole discretion to manage the operations of the company, including control of the company`s employees, finances and bank accounts, without the participation of the owners of the applicant company, then the applicant is considered a passive company and is not eligible for SBA funding. If a management agreement meets the FTC`s definition of a franchise and is not listed in the SBA Franchise Directory, the applicant is not eligible for SBA funding. Lenders should be aware that these criteria are not exhaustive and result from a decision that relates to a specific set of facts.

There may be provisions in other management agreements that could move the decision one way or the other on a case-by-case basis. However, the case is instructive with regard to the types of factors that the SBA has taken into account in the past and may take into account in the future when assessing affiliation on the basis of management agreements. SBA lenders that assess loans to borrowers through management agreements should be wary of potential affiliation and eligibility issues and take appropriate steps to ensure that such agreements are carefully assessed to ensure eligibility. In recent years, the use of "management agreements" has become a much more common way for small businesses to choose to manage their businesses. In industries as diverse as hospitality, self-storage and even professional services, the use of management agreements has become commonplace. However, using a management contract for a small business applying for an SBA loan can be difficult for SBA lenders. The SBA continues to update its guidelines for reviewing management agreements and determining the appropriateness of franchise concepts used by collective societies. Lenders should exercise caution when reviewing administrative arrangements to verify eligibility and make correct affiliation arrangements. We will provide updates on any further changes or developments to the management arrangements as they become available. For more information on affiliation issues, please contact Jennifer at [email protected] or 267-470-1206.

Although the SBA has not yet finalized written guidelines for management agreements at the time of this article, and if they create an affiliation, SBA officials have provided guidance on the criteria for determining affiliation in such circumstances by referring to a 1997 decision of the SBA`s Office of Hearings and Appeals. In the present case, it was a management agreement between a medical practice and a local hospital, under which the hospital would provide all administrative and non-medical aspects of business operations for a fee. The court focused on the following criteria in its decision that the administrative arrangement did not establish the affiliation between the small business and the collective company: For more information on the SBA membership arrangements for administrative arrangements, please contact Ethan at 267-470-1186 or email esmith@starfieldsmith.com. All SBA loan applicants and their affiliates must be small below the SBA size requirements when aggregated to participate in SBA loan programs. To determine whether there is an affiliation, the SBA analyzes an applicant`s ownership, management and franchising, licenses or other agreements and relationships at the time of application. A type of affiliation may arise when a single person, group or entity controls the management of the applicant entity through an administrative arrangement. For lenders, affiliation requirements under SBA guidelines are not always easy. However, the current version of the POS-SBA provides new guidance to lenders to determine whether a management agreement establishes an affiliation between the management company and the applicant, which requires that the management company be included in the standard applicant size analysis.

If an applicant has entered into an administrative arrangement and the entity is considered to be an active entity, no link shall be established between the applicant and the management company if the administrative arrangement provides for reasonable supervision by the applicant of the management company`s activities. SBA defines reasonable supervision as the express authorization of the applicant, as specified in the Administrative Agreement, to take at least all of the following actions: The views expressed in this document are solely those of the author and not of Martindale-Hubbell. This document is provided for informational purposes only and does not constitute legal advice or a substitute for consulting a licensed lawyer in any particular case or circumstance. .