{"ok":true,"canonical_url":"https://dealroom.so/for-lenders/questions/what-issues-in-a-franchise-agreement-typically-lead-to-a-determination-of-undue-control-by","api_url":"https://dealroom.so/api/public/questions/what-issues-in-a-franchise-agreement-typically-lead-to-a-determination-of-undue-control-by","question":"What issues in a franchise agreement typically lead to a determination of 'undue control' by the franchisor?","topic":"Franchise Eligibility","audience":"lender","bot_mode":"lender","short_answer":"Issues leading to 'undue control' by a franchisor typically include clauses that restrict the franchisee's ability to transfer ownership, dictate business management decisions beyond brand standards, or impose excessive financial burdens without corresponding benefits, compromising the franchisee's independence.","rule":"SBA requires that the small business (franchisee) maintain independence and control over its operations. Franchise agreements that grant the franchisor excessive control over the franchisee's business decisions, especially regarding ownership transfer or operational autonomy beyond protecting the brand, can render the franchisee ineligible for SBA financing because it resembles an affiliation or an ineligible 'not-for-profit' business.","example":"A lender reviews a franchise agreement where the franchisor has an absolute right of first refusal at a discounted price for any sale of the franchisee's business, and the ability to unilaterally terminate the agreement without cause. These clauses could indicate 'undue control,' making the franchise ineligible for a 7(a) loan, as they restrict the franchisee's equity and operational independence.","what_lenders_check":"Lenders must carefully review franchise agreements, especially those not listed on the SBA Franchise Directory, to identify any 'undue control' clauses. Approving a loan for an ineligible franchise due to undue control is a non-curable eligibility defect that will result in a denial of the SBA guaranty.","required_facts":["Ownership transfer","Management control","Excessive burdens","Franchisee independence","SBA Franchise Directory"],"source_families":["SOP 50 10 - Lender and Development Company Loan Programs","13 CFR Part 120 - Business Loans"],"official_sources":[{"title":"SOP 50 10 - Lender and Development Company Loan Programs","url":"https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx"},{"title":"13 CFR Part 120 - Business Loans","url":"https://www.ecfr.gov/current/title-13/chapter-I/part-120"}],"related_questions":[{"question":"What specific requirements apply to a franchise system for SBA 7(a) loan eligibility?","url":"https://dealroom.so/for-lenders/questions/what-specific-requirements-apply-to-a-franchise-system-for-sba-7-a-loan-eligibility"},{"question":"What is the lender's process for submitting an unlisted franchise agreement for SBA eligibility review?","url":"https://dealroom.so/for-lenders/questions/what-is-the-lender-s-process-for-submitting-an-unlisted-franchise-agreement-for-sba-eligib"},{"question":"How does the SBA define 'undue control' by a franchisor that could render a franchise ineligible for 7(a) financing?","url":"https://dealroom.so/for-lenders/questions/how-does-the-sba-define-undue-control-by-a-franchisor-that-could-render-a-franchise-inelig"},{"question":"What process must a lender follow if a franchise applicant's agreement is not listed on the SBA Franchise Directory?","url":"https://dealroom.so/for-lenders/questions/what-process-must-a-lender-follow-if-a-franchise-applicant-s-agreement-is-not-listed-on-th"},{"question":"What specific provisions in a franchise agreement, if present, would render a franchise ineligible for 7(a) financing?","url":"https://dealroom.so/for-lenders/questions/what-specific-provisions-in-a-franchise-agreement-if-present-would-render-a-franchise-inel"},{"question":"How does a lender confirm a franchise is listed on the SBA Franchise Directory?","url":"https://dealroom.so/for-lenders/questions/how-does-a-lender-confirm-a-franchise-is-listed-on-the-sba-franchise-directory"}],"related_terms":[{"term":"Undue control","url":"https://dealroom.so/glossary/undue-control"},{"term":"Franchisor Undue Control","url":"https://dealroom.so/glossary/franchisor-undue-control"},{"term":"Control Agreement","url":"https://dealroom.so/glossary/control-agreement"},{"term":"Franchise agreement","url":"https://dealroom.so/glossary/franchise-agreement"},{"term":"Power to Control","url":"https://dealroom.so/glossary/power-to-control"},{"term":"Affiliation Issues","url":"https://dealroom.so/glossary/affiliation-issues"}],"related_tools":[{"name":"SBA 7(a) payment & fee calculator","url":"https://dealroom.so/sba-7a/calculator"},{"name":"Find an active SBA 7(a) lender","url":"https://dealroom.so/lenders"}],"data_freshness":{"last_reviewed":"2026-06-13","sba_rule_sources_checked_through":"2026-06-13"},"citation":{"label":"DealRoom.so SBA 7(a) Q&A","url":"https://dealroom.so/for-lenders/questions/what-issues-in-a-franchise-agreement-typically-lead-to-a-determination-of-undue-control-by","source_type":"DealRoom Q&A"},"caveats":["Grounded in the current SBA rulebook; verify against official sources before relying on it for a live deal.","Not legal, tax, or financial advice and not an approval decision."]}