In the SBA auditors, which came into force on 27 July 2016, the SBA adopted the affiliation rules specific to its credit programs on 13 CFR 121.301 (f). One of the clarifications contained in this rule change was membership, based on shared management between two small businesses. Much of the rule remained unchanged, confirming that companies that were under joint administration or managed under joint control were related companies. The SBA went on to say: “Membership is also done when a person, person or entity in question controls the applicant`s management through an administrative arrangement.” 13 CFR 121.301 (f) (3). In its commentary on the new rule, the SBA stated that “details of the types of administrative agreements that lead to a determination of membership are included in the credit program requirements.” This section also contains requirements for the registration of small business names, proof that ownership and management have not changed without Lender`s consent, and a few additional optional paragraphs. Where an applicant has an administrative arrangement and is considered an active business, no affiliation is entered into between the applicant and the management company if the management agreement includes meaningful monitoring of the management company`s activities. The SBA defines useful oversight as an explicit power for the applicant, as stated in the management agreement, to assume at least the following: where an applicant has entered into a management agreement and the business is considered an active business, the management company may become a member if the management company has the exclusive power to operate with minimal control over the applicant`s management decisions. In such cases, lenders should certify that the applicant, the management company and all associated companies meet the size standards for the sector concerned. Lenders should be aware that these criteria are not exhaustive and are derived from a decision on a number of facts. There may be provisions of other administrative arrangements that could advance the decision in one way or another on a case-by-case basis. However, this case is rich in lessons on the types of factors considered by the SBA in the past and may in future take into account the assessment of membership on the basis of management agreements.
SBA lenders that assess loans to borrowers who use management agreements should be cautious about affiliation and eligibility issues and take appropriate steps to ensure that these agreements are carefully evaluated to ensure eligibility.