The Global Economy and Business

There is a legal document that any franchisee must be supplied with before the signing of the Franchise Agreement. The Federal Trade Commission (FTC) has made such a regulation in order to provide franchisees with material information about operation of franchise system. UFOC is urged to help franchisees understand and analyze franchisor’s intentions.
The Uniform Franchise Offering Circular must be presented to franchisee 10 days before the signing of the Franchise Agreement.

Every franchise company in every industry should provide its prospective franchisees with that information divided by the following 23 categories:
1.The Franchisor and Any Predecessors
2.Identity and Business Experience of Persons Associated with Franchisor
3.Litigation History
4.Bankruptcy (i.e., any franchisees who may have filed)
5.Listing of the Initial Franchise Fee and Other Initial Payments
6.Other Fees and Expenses
7.Statement of Franchisee’s Initial Investment
8.Obligations of Franchisee to Purchase or Lease from Designated Sources
9.Obligations of Franchisee to Purchase or Lease in Accordance with Specifications or from Authorized Suppliers
10.Financing Arrangements
11.Obligations of the Franchisor; Other Supervision, Assistance or Services
12.Exclusive/Designated Area of Territory
13.Trademarks, Service Marks, Trade Names, Logotypes and Commercial Symbols
14.Patents and Copyrights
15.Obligations of the Franchisee to Participate in the Actual Operation of the Franchise Business
16.Restrictions on Goods and Services Offered by Franchisee
17.Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related Information
18.Arrangements with Public Figures
19.Actual, Average, Projected or Forecasted Franchise Sales, Profits or Earnings
20.Information Regarding Franchises of the Franchisor
21.Financial Statements
22.Contracts
23.Acknowledgment of Receipt by Respective Franchisee

Every loan is not more than a transaction between two parties. The first party is the lender (bank, financial institution, government authority and so on) another is the borrower (person, company, organization or institution). When people speak about obtaining a loan to start or expand a franchise business in most cases they consider the eligibility of their idea or business sphere to get a credit. But this is a two-way road. The franchisee needs to check the eligibility of the loan conditions to finance his/her idea. Today I’m going to write about the conditions of the Small Business Administration loans programs. I’ll tell you what they can provide you (what you have to provide them I described in my previous messages).

While thinking if the SBA programs are suitable for you the first thing to take into consideration is the maximum money you can obtain. The SBA’s 7(a) Loan Program limits the loan amount to a maximum of $2,000,000 dollars. But is doesn’t mean that you will get the Small Business Administration guaranty for the whole sum of loan. SBA’s maximum guaranty is $1,500,000. Thus, if a business managed to get the SBA guaranteed loan for $2,000,000 dollars, the maximum guaranty to the lender will be $1,500,000 or 75 percent.

The next thing is interest rate. It’s necessary to take it into consideration and to compare with other possible loans because interests will increase your company’s fixed costs.
As you can learn from my other articles dedicated to the SBA, this government institution doesn’t provide money itself but provides guaranties. It means that the interest rates are a subject to negotiations as regarding any other loan from commercial institution. But at the same time the Small Business Administration establishes maximums, which are pegged to the Prime Rate. This is one of their instruments of small business support.
In most case the interest rate is fixed (it’s easier to calculate I think) and it depends on the amount of loan and its maturity. Below you can see the table of possible fixed rates.

Loan amount Maturity Interest rate
$50,000 or more less than 7 years Prime Plus 2.25
$50,000 or more more than 7 years Prime Plus 2.75
$25,000 - $50.000 less than 7 years Prime Plus 3.25
$25,000 - $50.000 more than 7 years Prime Plus 3.75
$25,000 or less less than 7 years Prime Plus 4.25
$25,000 or less more than 7 years Prime Plus 4.75

Sometimes financial institutions use variable rate loans. The formula to calculate the interest rate is rather complicated. It uses the fixed rates presented above and rates the federal government pays for loans. It means that this rate is more adjusted to the economic changes like inflation, recourses’ prices, stock market situation and government monetary and fiscal policy. The rate can change not often than monthly and must be consistent (calculated on either monthly, quarterly, semiannually, annually or any other defined, consistent basis). So in the case of variable interest rate the lender and the borrower negotiate the amount of the spread that will be added to the base rate.
It’s also should be mentioned that SBA strictly prohibits the majority of the fees of SBA loan applicants.
And there’s one more thing that should be taken into consideration. It’s the prepayment penalty.
SBA loans that have the maturity 15 years or more and the prepayment amount is over 25 percent of the whole amount and the prepayment is made within the first three years are charged the penalty.
It could be calculated this way: 5% during the first year, 3% during the second year or 1% during the third year after disbursement.
This information is enough to estimate whether you are capable to receive the SBA loan and whether you need it.

The first legislative act I want to write about will be the Small Business Franchise Act (the SBFA). I’ve read its statements and decided to range them according to their importance (as I think) for small business in general and franchise business particularly.
 
That Small Business Franchise Act was signed in 1999 after it raised heated debate. The proponents believed that the Act was necessary to protect the rights of small franchisees and to create favorable conditions for their development. But opponents insisted that this bill is only a waste of time and tax money as there was the good franchise legislation on the one hand, and the good small business legislation accompanied by different government supporting programs. Anyway the bill passed and I’m going to say some words about its content.
 
The first (not by the order but by its importance according to my opinion) statement of the Act protects the franchisee against unlawful transfer of the business. I think this to be very important because in the most cases franchisee is very dependent on the franchisor’s behavior according to their agreement. I’m not against this dependence but in the case when franchisor decides to sell his business, or to merger the new owner can easily forget about the rights and problems of franchisee (especially if we are speaking about a small business). So the SBFA guaranties that franchisees would be given at least 30 day’s notice of the franchisor’s transfer of ownership to another entity. I want to draw attention to the number of days. To my mind it’s very good that the bill not only makes franchisor to provide the information but also establishes the period of time. It would help franchisee to prove that his rights were violated.
 
The second statement I want to speak about protects the franchisee from unreasonable termination. As I understand this guaranty is rather close to the previous one. It will protect the small company from franchisor’s groundless decisions. According to the bill the main company has to provide a good cause to explain why it doesn’t want to continue business relations with franchisee. At the same time a compulsory 30-day period must be given to the franchisee to cure any defaults. The only thing I need to mention here is that I have a doubt that 30-day period would be enough in some difficult cases (for example in the situation when companies are located in different countries). Anyway according to the Small Business Franchise Act after that period both companies have the rights to turn to the court.
 
The third very important part of the Act ensures procedural fairness in the relations between franchisee and franchisor. It means that the conditions of the Small Business Franchise Act are more important in comparison with the conditions of the agreement between the main company and its small franchisee. Nothing in the agreement can limit or eliminate any of the franchisee’s rights.
 
The number four in that list imposes limited fiduciary duty on the franchisor. In English it will sound like this: “Franchisor must provide financial information about their activity to the franchisor”. Why? Because franchisee’s business results depend on franchisor’s decisions and financial decisions are not an exclusion. But is it fair toward franchisor? Yes, because he will provide a full disclosure of disbursements and a full accounting only for the money received from franchisee. The main company must not provide any co-called secret information, or information about long-term investment in some projects that have no connection with franchise business at all.
 
The fifth important part of the bill is dedicated to relations between the franchisor and the franchisee after the franchise agreement has expired. This regulation protects the rights of both parties. On the one hand, it permits the former franchisee to continue business activity in any sphere and at any location. On the other hand, the bill prohibits using the franchisor’s intellectual property, trademark, or any other commercial or business secrets. Why do I consider this part of the Small Business Franchise Act to be less important than the previous ones? Because I really believe that every clever franchisor will include the same point in the franchise agreement and the Act only provides additional guaranty.
 
OK. I’ve reached the middle of the list of the important regulations in the SBFA. Let’s go forward! In the sixth part I’ll speak about trade relations between the main company and its franchisee. The authors of the bill decided that they needed to guaranty the freedom of any franchisee while buying goods and services for the business purposes. It means that it’s illegal for franchisor to include in the franchise agreement the point saying that franchisee is obliged to purchase raw materials, equipment, other goods and services only from the main company. I like this statement but don’t think this to be so important than the previous ones. I really think that freedom is a good thing but as I understand the franchisor has an incentive to provide beneficial conditions for franchisee to attract him and it’s better to buy from the main company and save some money on transactional costs.
 
The next item of the Act is very sound but a little bit naïve as I think. That’s why I gave it only the seventh place in my list of importance. It speaks about common to all mankind values as honesty, good behavior and good faith. The Small Business Franchise Act insists that every party in the relations has to “act honestly and in good faith with each other and observe reasonable standards of fair dealing in the trade”. But how measure the level of honesty, reasonability or faith? I have no idea…
 
 
 
Three more left… Brace up! The SBFA also says some words about the relationships with government and local authorities. The Act gives the right to an attorney general of any state interfere in the transactions between the franchisor and the franchisee by bringing a civil action on behalf of its residents in an appropriate U.S. District Court. It can happen if the government official believes that that the SBFA is being violated. I put it on the eighth place because I think that the same statement characterizes every legislative act. I mean that to ensure the law is the main role of every government. Am I right?
 
The last two statements are the least important. The first of them determines that small business franchisees have the right to form and to participate in trade associations. And the last statement of the bill acts as a slogan as I think. It establishes that perpetrating a fraud within the franchisor-franchisee relationship is prohibited. It’s not more than a remainder of the statements of the other general business laws.
 
At the end of my comments to the Small Business Franchise Act I want to remind that this list of more or less important regulations of the bill is only my personal point of view. Can anyone introduce his or her list? I will be very happy to hear any grounded ideas.

I’m opening a new category in my blog speaking about the franchise and small business law. During all that time I was writing my articles I was choosing between a wide topic of small business and narrow topic about franchise. If you read my blog you can easily see that many times if was very difficult for me to make this choice.
  Looking back I realize that very often I start my article about franchise but can’t stay focused on it. I really hope that nobody will find a big problem in it. I like both topics and both concepts because both of them play a tremendous role in the world economy and both of that spheres involve ordinary people who managed to achieve something in their lives and every day impact the development of our society. I want my site to help these people to operate better. And I want newcomers to make it easier, faster and more successful.
 The proverb says that it’s much wise to learn by somebody’s mistakes but not by your own. And I believe that my new category will be helpful.