SBA rules · SOP 50 10 8.1

Can an SBA loan finance a business run by a management company?

Yes, an SBA loan can finance the business provided the third-party management company does not have sole discretion over business operations and the applicant exercises meaningful oversight.

Quoted from SBA SOP 50 10 8.1Every quote checked word for word

In detail

Meaningful oversight: The management agreement must provide for the applicant to approve the annual operating budget, approve capital expenditures or operating expenses over a significant dollar threshold, control bank accounts, and oversee the employees operating the business, who must be employees of the applicant.
Sole discretion prohibition: If the management agreement grants the management company sole discretion over business operations, the business is an ineligible passive business.
Lender review: Unless the agreement is part of the franchise disclosure documents for a brand listed on the SBA Franchise Directory, the lender must review the agreement to ensure the applicant is not an ineligible passive business.
Franchise restriction: For franchise applicants, the business is ineligible if the management company is the franchisor or affiliated with the franchisor.
Guaranty requirements: When deemed necessary for credit or other reasons, SBA or the lender may require entities that manage day-to-day operations through a management agreement to provide a full or limited guaranty, even with no ownership interest.

The source

What the SOP says

“Businesses that have entered into a management agreement with a third party that gives the management company sole discretion over the business operations are ineligible passive businesses. However, if the management company does not have sole discretion to manage the operations of the business and the Applicant exercises meaningful oversight of the business, the Applicant is eligible.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Passive Businesses 13 CFR § 120.110(c): (lines 406-418)✓ Verified

“Have oversight over the employees operating the business (who must be employees of the Applicant).

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Passive Businesses 13 CFR § 120.110(c): (lines 419-422)✓ Verified

“If the Applicant franchisee is operating under a management agreement where the management company is, or is affiliated with, the franchisor, the Applicant is not eligible. Such a relationship does not result in the franchisee operating as an independent small business.

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Franchise Applicants with Management Agreements: (lines 603-612)✓ Verified

“This may include entities who manage the day-to-day operations of the Applicant or OC through a Management Agreement without an ownership interest in the Applicant or OC.

SOP 50 10 8.1, Chapter 5: Other Core Requirements > Corporate/Other Guaranties: (lines 1354-1358)✓ Verified

Have a deal in mind?

Tell us about it and we will tell you how these rules apply, and which lenders finance deals like yours.

See if your deal qualifies →Broker or lender? Ask the SOP your own question