What acknowledgement must a Fly Fitness franchisee obtain from a lender when pledging a security interest?
Fly_Fitness Franchise · 2024 FDDAnswer from 2024 FDD Document
If Franchisee is in full compliance with this Agreement, Franchisee may pledge or give a security interest in Franchisee's interest in the Assets and the Franchised Business to a lender of the funds needed by Franchisee for Franchisee's initial investment, provided that the security interest is subordinate to Franchisee's obligations to Franchisor, that a foreclosure on such a pledge or security interest and/or any Transfer resulting from such a foreclosure shall be subject to all provisions of this Agreement, and that Franchisee obtains from the lender a written acknowledgement to Franchisor of these restrictions. Notwithstanding the foregoing, in the event Franchisee obtains financing whereby funding is provided with the assistance of the United States Small Business Administration ("SBA Financing"), Franchisee shall be permitted to grant the lender of such SBA Financing a senior lien on any Uniform Commercial Code collateral Franchisee uses to secure the SBA Financing, and Franchisor agrees to (i) subordinate its interest in any lien on Franchisee's Uniform Commercial Code collateral to that of the lender of the SBA Financing and (ii) waive the requirement of the written acknowledgement referenced in this Section.
Source: Item 22 — CONTRACTS (FDD pages 44–45)
What This Means (2024 FDD)
According to Fly Fitness's 2024 Franchise Disclosure Document, a franchisee may pledge a security interest in the assets and franchised business to a lender for funding their initial investment, provided certain conditions are met.
Specifically, the security interest must be subordinate to the franchisee's obligations to Fly Fitness. Additionally, any foreclosure on the pledge or security interest, and any transfer resulting from such a foreclosure, must adhere to all provisions of the Franchise Agreement. To ensure these conditions are understood and agreed upon, the franchisee must obtain a written acknowledgement from the lender to Fly Fitness regarding these restrictions.
However, there is an exception to this requirement. If the franchisee obtains financing with the assistance of the United States Small Business Administration (SBA), and the funding is provided through SBA Financing, the franchisee is permitted to grant the lender a senior lien on any Uniform Commercial Code collateral used to secure the SBA Financing. In this case, Fly Fitness agrees to subordinate its interest in any lien on the franchisee's Uniform Commercial Code collateral to that of the SBA lender and waives the requirement for a written acknowledgement from the lender.