On April 3, 2020, banks commenced taking applications for the Small Business Administration’s (“SBA”),  Paycheck Protection Program (the “PPP”) loans, as provided in the Coronavirus Aid, Relief, and Economic Security Act aka the CARES Act.  At the highest level, the PPP allows eligible businesses to borrow up to 2.5x average monthly payroll costs from the last year, subject to a $10 million cap.

The SBA issued guidance with respect to the Affiliation Rules applicable to the PPP.  Affiliation determinations are significant under the PPP because the applicant and each “affiliate” is viewed as one business for purposes of calculating the number of employees.  Subject to certain exceptions, only businesses with 500 or fewer employees residing in the United States and in operation on February 15, 2020 are eligible to borrow under the PPP.

Under the SBA’s PPP guidance, entities are affiliates when one controls or has the power to control the other, or a third party has the power to control both.  It does not matter if control is exercised, just that it may be exercised.  The types of control that the guidance describes goes beyond majority ownership, but to the actual power to make significant decisions for a business – through ownership, control of a board of directors or other contractual means.

So, the good news? The affiliation rules are waived for “any business concern operating as a franchise that is assigned a franchise identifier code by the SBA”.  So, though franchisees, through their franchise agreements, system standards set by their franchisor in the franchise agreement and operating manuals, the employees of the franchisor (and potentially other franchisees) will not be counted with those of the franchised business to determine if the business has less than 500 employees, so long as the franchise has been listed on the SBA franchise registry.

Importantly, the exemption for franchised businesses listed on the SBA Franchise Registry merely means that the affiliation rules to not apply.  Under the guidance, a franchised business is eligible for a PPP loan, but if the franchise system has over 500 employees and the franchisor is not listed on the Registry, it is possible the SBA may apply the affiliation rules.  At this point, it is not certain.

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