Buying an Existing Franchise (Resale) with an SBA Loan

Why franchise resales are different

Buying an existing franchise location combines two things: an ordinary small-business acquisition, and a relationship with a franchisor that has its own rules and veto. The SBA loan side works like any other change of ownership (see buying a business with an SBA loan). This page covers the franchise layer on top.

Step one: check the SBA Franchise Directory

The SBA keeps a Franchise Directory of brands it has reviewed and found eligible. If the brand you’re buying meets the FTC definition of a franchise, it must be on the Directory before a lender can submit or approve an SBA loan; if it isn’t listed, the application can’t proceed until it is. Some licensing, dealer and similar relationships are treated as franchises for this purpose even if nobody calls them that.

Placement on the Directory is not an endorsement of the brand or a sign that it will succeed. It just clears one eligibility question. Check it before you spend money on diligence; it takes minutes, and the SBA publishes it on its website.

Step two: the franchisor’s approval

Almost every franchise agreement gives the franchisor the right to approve a transfer. Expect some combination of:

• An application and approval of you as an operator: experience, finances, sometimes an interview.
• Training you must complete, often before closing.
• A transfer fee.
• A new franchise agreement on the franchisor’s current terms, which can change royalty, marketing fund, technology fees or territory.
• Remodel or upgrade requirements to bring the location to current standards.
• A release from the seller and sometimes a right of first refusal for the franchisor to buy the location itself.

Each of these affects your timeline and your costs. Ask the franchisor for its transfer package early, and put the franchisor’s conditions on your closing checklist alongside the lender’s.

What the lender looks at

This location’s numbers. The franchisor’s disclosure document may include system-wide financial information, and it’s useful context. But the loan is sized from this unit’s tax returns and verified cash flow. A location underperforming its system is a lower-value business, whatever the brand.

Royalties and fees under the new agreement. If the new agreement charges more than the seller paid, the lender will run the cash flow with the new costs, and so should you.

The franchise system’s track record. When a franchise is involved, the lender must review credit information the franchisor provides, such as the number of failed franchisees and any cash-flow projections. Unit closures and transfers in the disclosure document are worth reading yourself, too.

Management. If you plan to run the unit through a manager rather than personally, the lender will look at how day-to-day operations will be handled, and some management arrangements raise eligibility questions. Raise it up front.

The lease. Many franchise locations are leased, sometimes with the franchisor involved in the lease. The same questions apply as in any acquisition: assignability, remaining term, rent.

Valuation and the remodel

The lender orders an independent valuation of the business. If the price exceeds what the valuation supports, the difference generally has to come from equity, not more debt. Brand value doesn’t excuse a high multiple of weak cash flow. See how to value a business for an SBA loan.

A required remodel is a real cost of the deal. Include it in the project, with a contractor estimate, so the equity and the loan are sized correctly.

Common resale pitfalls

• Discovering the new agreement terms late. The price was set on the old royalty structure.
• Franchisor approval running behind the lender. Two approval tracks, and the slower one sets the date.
• Remodel left out of the budget. Then it’s funded from working capital the business needed.
• Buying a unit the franchisor wants to close or relocate. Ask the franchisor directly about the location’s standing.

Next steps

Start with the Directory, then the franchisor’s transfer package, then the numbers. Gather your materials using documents you’ll need, test the deal in the acquisition calculator, and see how business acquisition financing is put together. If you’re considering a resale, tell us about it and we’ll give you an honest read on the structure.