Buying A Franchise Resale With An SBA Loan

Why Buy A Franchise Resale

A franchise resale is an existing, operating franchise location that the current owner is selling. You are not opening a new unit. You are buying one with customers, staff, a track record and tax returns.

For SBA financing, that history is the big advantage. A start-up franchise is underwritten on projections. A resale is underwritten like any acquisition, on the location's actual cash flow, and the lender can see how the unit has really performed. You also get the brand's training, systems and support.

The trade-off is price. A profitable location usually sells for more than the cost of opening a new one, because you are paying for proven earnings.

The SBA Franchise Directory

If the brand meets the FTC definition of a franchise, it must be listed on the SBA Franchise Directory for you to get SBA financing. The lender checks the Directory before it approves the loan, or before it sends the application to SBA. If the brand is not listed, the loan cannot go forward until the franchisor gets the brand added.

A few things to know about the Directory:

• It is a check of eligibility, not quality. SBA says plainly that a listing is not an endorsement or a guaranty that the brand will succeed.
• It simplifies the paperwork. Because SBA has already reviewed listed brands, lenders no longer need to review the franchise documents themselves for eligibility, except for certain management agreements that are not part of the franchise disclosure documents.
• It may flag extra issues. Some listings note things the lender must still look at for that brand.

Check the Directory on SBA's website before you get far into any franchise deal. It takes a few minutes and can save you weeks.

Franchisor Approval And The Transfer Process

The franchise agreement almost always gives the franchisor the right to approve any new owner. In practice, the transfer usually involves:

1. An application to the franchisor, with your background, finances and experience.
2. Interviews or a discovery day, so the franchisor can meet you.
3. Training, often required before closing or soon after.
4. A transfer fee, set in the franchise agreement.
5. A new or assigned franchise agreement. Some brands assign the seller's agreement to you; others require you to sign their current agreement, which may have different royalties, fees or a new term.
6. Upgrades. Some franchisors require a remodel, new equipment or technology upgrades as a condition of transfer.

Ask the franchisor for its transfer requirements in writing early. Franchisor approval is one of the most common reasons franchise resales take longer than planned, so it belongs in your LOI to closing timeline.

What To Read In The FDD

The franchisor gives you a franchise disclosure document, or FDD, before you sign. It is long, but a few sections deserve your full attention:

• Fees. Royalties, marketing fund contributions, technology fees and the transfer fee.
• Financial performance representations, if the brand provides them, so you can compare the location you are buying with the system.
• Outlet data. How many units opened, closed and changed hands. Many transfers or closures can be a warning sign.
• Litigation and bankruptcy history of the franchisor.
• Renewal, termination and transfer terms, including what happens if you want to sell later.
• The franchisor's financial statements.

Have a franchise attorney review the FDD and the agreement. This article is general information, not legal advice.

Underwriting The Location Itself

Beyond the franchise steps, the lender underwrites the resale like any other purchase:

• Cash flow. The location's historical cash flow must cover all debt payments at least 1.25 times. Royalties and marketing fees are real expenses, so they stay in the numbers.
• Tax returns. The lender analyzes three years of the location's financials and verifies the tax returns against IRS transcripts.
• Valuation. An independent valuation, ordered by the lender, must support the price.
• Seller exit. The seller cannot stay on as an owner or employee, but can consult for up to 24 months to help with the handover.

If you are comparing locations, our guide on how to evaluate a business listing shows a quick screen that works for franchises too.

A Worked Example

Here a buyer purchases an existing fitness franchise. The franchisor charges a transfer fee and requires an equipment refresh as a condition of approval.

Notice that the transfer fee and the refresh raise the total project, so they raise the Down Payment too. Budget for them from the start. For more on the sources you can use, see the SBA Down Payment guide and using a ROBS 401(k) to buy a business.

Franchise Resales We Have Financed

Franchise acquisitions are a regular part of our work, across home services, automotive and more. A few examples:

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

The outdoor living franchise combined retirement funds with a seller note on full standby, while the handyman franchise used a seller note on 24-month standby. Only a note on full standby counts toward the Down Payment. A note with a shorter standby is seller debt with a payment holiday, so the business cash flow has to carry its payments once they start.

Tips For A Smooth Franchise Resale

• Confirm the brand is on the SBA Franchise Directory before you make an offer
• Get the franchisor's transfer requirements, fees and timeline in writing
• Ask whether you will sign a new franchise agreement and how its terms differ
• Find out about any required remodel or upgrades and price them into the project
• Talk to other franchisees, including a few who left the system
• Get the location's tax returns, not just the franchisor's system averages
• Get pre-qualified so the seller and the franchisor see you can close

See the full product details on our SBA business acquisition loan page.