For SBA lenders
Short answer
SBA defines 'undue control' by a franchisor as contractual provisions that limit the franchisee's ability to operate independently, such as mandating specific suppliers, setting prices, or restricting transfer of ownership without franchisor's absolute discretion.
SBA requires that a small business borrower, including a franchisee, must have the right to profit from its efforts and be able to operate its business without 'undue control' by another party. Franchise agreements with excessive control over day-to-day operations, pricing, or unmitigated rights of first refusal can indicate an ineligible franchisor-franchisee relationship.
A franchise agreement stipulates that the franchisor has an absolute right to approve any sale of the franchisee's business without reasonable criteria, or mandates all supplies must be purchased from franchisor-owned entities at non-competitive prices. These clauses could indicate undue control.
Insider move
Lenders must identify and understand clauses in franchise agreements that could trigger 'undue control,' as this makes the business ineligible for SBA financing. Failure to identify such clauses can lead to a guaranty denial.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
More on franchise eligibility
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