Franchise Resale Financing: Buying an Existing Franchise Location
How to finance buying an existing franchise location from a current franchisee, including valuation, due diligence, and financing strategies.
Buying an Existing Franchise vs. Starting New
Purchasing an existing franchise location—a resale—offers significant advantages over building from scratch. You inherit an established customer base, trained staff, and proven cash flow. The business generates revenue from day one, reducing the risk of the startup phase.
However, resales also carry risks: you may inherit problems, valuations can be inflated, and the franchisor must approve the transfer. Understanding the process helps you find good deals and avoid expensive mistakes.
Why Franchisees Sell
Understanding seller motivations helps you evaluate opportunities:
- Retirement - Often the best opportunities. Proven operators cashing out.
- Relocation - Personal reasons requiring sale. Usually motivated sellers.
- Burnout - Operational challenges. Investigate thoroughly.
- Performance issues - May be turnaround opportunity or trap.
- Health problems - Urgent sales may offer negotiating leverage.
- Estate sales - Franchise sold after owner's death. Often below market.
- Portfolio optimization - Multi-unit operators selling underperformers.
Retirement sales from long-time operators often represent the best opportunities. They have stable operations, trained staff, and motivated sellers who want their legacy continued.
Typical Franchise Resale Valuations
Franchise resales typically value based on earnings multiples:
| Performance Level | Typical Multiple | Example Price |
|---|---|---|
| Below average (struggling) | 1.0-1.5x SDE | $100K profit = $100-150K |
| Average performer | 1.5-2.5x SDE | $100K profit = $150-250K |
| Strong performer | 2.5-3.5x SDE | $100K profit = $250-350K |
| Top performer | 3.0-4.0x SDE | $100K profit = $300-400K |
Financing a Franchise Resale
Resale financing is similar to new franchise financing with some differences:
- SBA 7(a) remains the primary option
- Historical financials make underwriting easier
- Goodwill typically finances over shorter term
- Equipment may be older, affecting collateral value
- Lease assignment must be confirmed
- Franchisor transfer approval required before closing
The Franchisor's Role
The franchisor must approve all resales. Their requirements typically include:
- Buyer meets franchisee qualification standards
- Transfer fee payment (usually $5,000-$25,000)
- Current franchisee in good standing (no defaults)
- Facility meets current brand standards (may require upgrades)
- New franchise agreement signing (current terms, not seller's terms)
- Training completion before transfer closes
Due Diligence for Resales
Critical areas to investigate before buying:
| Area | Key Questions |
|---|---|
| Financials | Are tax returns and P&L consistent? Owner salary add-backs? |
| Lease | Term remaining? Rent increases? Assignment rights? |
| Equipment | Age and condition? Deferred maintenance? |
| Staff | Key employees staying? Labor costs accurate? |
| Customer base | Repeat customer percentage? Trends? |
| Compliance | Any franchisor violations? Required upgrades? |
| Competition | New competitors? Market changes? |
Example: Restaurant Franchise Resale
Resale opportunity: Fast-casual franchise, $800K revenue, $120K owner benefit, 8 years operating, seller retiring.
| Component | Details |
|---|---|
| Asking price | $350,000 (2.9x SDE) |
| Negotiated price | $310,000 |
| Transfer fee | $15,000 |
| Required upgrades | $25,000 (POS and signage) |
| Total acquisition | $350,000 |
| SBA loan (90%) | $315,000 |
| Down payment | $35,000 |
| Monthly payment | ~$4,100 |
| Existing cash flow | $10,000/month |
| Coverage ratio | 2.4x (comfortable) |
Negotiating Resale Purchases
Leverage these factors in negotiations:
- Required upgrades to meet current standards
- Lease term limitations
- Equipment age and replacement needs
- Seller motivation and timeline pressure
- Seller financing participation
- Transition support requirements
- Non-compete terms
Common Resale Mistakes
Avoid these acquisition errors:
- Trusting seller financials without verification
- Ignoring lease assignment requirements
- Not confirming franchisor approval before committing
- Underestimating required upgrades
- Overpaying for declining locations
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.