Buying an Existing Franchise: Pros, Cons, and How to Evaluate a Resale

What Is a Franchise Resale?

A franchise resale occurs when an existing franchisee sells their operating franchise unit to a new buyer. Instead of signing a new franchise agreement, building out a location from scratch, and spending months ramping up, you purchase a business that is already open and generating revenue.

Franchise resales represent a significant portion of the franchise market. In mature franchise systems, resale transactions can account for 30-50% of all new franchisee entries. Some buyers specifically seek resales because they want to avoid the startup phase entirely; others stumble into resale opportunities while researching new franchise units.

The resale market exists because franchise owners exit their businesses for the same reasons any business owner does: retirement, relocation, health issues, burnout, desire to pursue other opportunities, or, in some cases, because the business is underperforming and they want to cut their losses.

Why Do Franchise Owners Sell?

Understanding the seller’s motivation is critical to evaluating a resale opportunity. Common reasons include:

• Retirement — The owner has reached the end of their career and wants to cash out. These are often the best resale opportunities because the business has been built up over many years.
• Relocation — A family or personal move makes continued operation impractical. The business itself may be perfectly healthy.
• Burnout or lifestyle change — Running any business for years is demanding. Some owners simply want out, even if the business performs well.
• Underperformance — The business is not producing the income the owner expected or needs. This is the riskiest category for buyers — but also where the biggest bargains exist if you can identify and fix the problems.
• Partnership disputes — Multi-owner franchises sometimes face partner disagreements that result in a sale.
• Health issues — Unexpected health problems force a sale. These can be good opportunities because the business was not on the market by choice.
• Multi-unit portfolio management — An owner with multiple locations may sell a lower-performing unit to focus on stronger ones.

During your due diligence, always ask the seller directly and honestly why they are selling. Verify their answer by speaking with employees, reviewing financial trends, and asking the franchisor for their perspective.

Advantages of Buying a Franchise Resale

Existing Cash Flow

The most compelling advantage is that a resale generates revenue from day one. You are not spending six to twelve months building out a location, hiring staff, and waiting for customers to discover your business. An established franchise has existing customers, established revenue streams, and predictable monthly cash flow that you can underwrite before purchasing.

Trained Staff in Place

Hiring and training a team from scratch is one of the most time-consuming and expensive parts of starting a new franchise. A resale comes with employees who already know the systems, the customers, and the daily operations. Key staff members (managers, lead technicians, experienced servers) can be invaluable assets.

Established Customer Base

A franchise location that has operated for several years has built customer relationships, local brand awareness, and a reputation in the community. This is especially valuable in service-based franchises where repeat business and referrals drive revenue.

Skip the Startup Phase

The first 12 to 24 months of a new franchise are typically the hardest — operating losses during ramp-up, learning curves, staff turnover, and the stress of building everything from zero. A resale lets you bypass this phase entirely and step into a stabilized operation.

Known Financial History

Unlike a new franchise where you are projecting future performance based on Item 19 data and comparable units, a resale has actual tax returns, profit-and-loss statements, and bank records that show exactly what the business has earned. You are evaluating facts, not projections.

Potential for Improvement

If you are buying a business from an owner who was burned out, disengaged, or simply not optimizing the operation, there may be significant upside. Improving management, marketing, customer service, or operational efficiency can increase revenue and profitability from the established baseline.

Disadvantages of Buying a Franchise Resale

Higher Purchase Price

The obvious trade-off for an operating business with cash flow is a higher price. While a new franchise unit might cost $250,000 in total initial investment, a resale of the same brand producing $100,000 in annual cash flow might sell for $350,000 to $500,000. You are paying a premium for the reduced risk and immediate income.

Inherited Problems

Not every aspect of an existing business is an asset. You may inherit:

• Problem employees who resist a new owner’s management style
• Negative customer reviews and a damaged local reputation
• Deferred maintenance on equipment, vehicles, or the physical location
• Unfavorable vendor contracts or supplier relationships
• Existing legal issues — pending complaints, tax liens, or unresolved disputes

Lease Transfer Complexity

The existing lease must be assigned or a new lease negotiated with the landlord. Landlords may demand higher rent, a new personal guarantee, or lease modifications as a condition of approving the transfer. In some cases, landlords use the transfer as an opportunity to renegotiate terms unfavorable to the new franchisee.

Equipment Age and Condition

Equipment, vehicles, and technology systems depreciate. A franchise that has been operating for eight years may need significant capital expenditure within the first few years for equipment replacement, technology upgrades, or a franchisor-required remodel. Factor these costs into your purchase analysis.

Franchisor Approval Required

Every franchise resale requires the franchisor’s approval. The franchisor will evaluate the buyer’s financial qualifications, background, and operational capability. This is not a rubber stamp — franchisors do reject transfer applications, and the approval process can take 30 to 90 days.

Transfer Fees

Item 6 of the FDD specifies the transfer fee — a one-time fee paid to the franchisor when a franchise unit changes ownership. Transfer fees typically range from $5,000 to $25,000 or more, depending on the brand. Some franchisors charge a percentage of the sale price rather than a flat fee. This is an additional cost beyond the purchase price.

How to Value a Franchise Resale

Franchise resales are typically valued using one or more of these methods:

Multiple of Seller’s Discretionary Earnings (SDE)

The most common valuation method for small franchise businesses. SDE equals net income plus the owner’s salary, benefits, and discretionary expenses added back. Franchise resales typically sell for 2x to 4x SDE, depending on the brand, industry, growth trajectory, and local market.

Factor	Lower Multiple (2-2.5x)	Higher Multiple (3-4x)
Revenue trend	Flat or declining	Growing
Brand strength	Weaker or newer brand	Established, well-known brand
Lease remaining	Short remaining term	Long remaining term with options
Owner dependency	Owner-operator critical to business	Manager-run, semi-absentee
Equipment condition	Aging, needs replacement	Recently updated
Market	Saturated or declining	Growing market with opportunity

Asset-Based Valuation

For underperforming resales, the business may be valued based on the tangible assets (equipment, inventory, leasehold improvements) minus liabilities. This effectively prices the business at its liquidation value plus the value of the franchise rights. Asset-based valuations are appropriate when the business is not generating meaningful profit.

Comparable Sales

What have other units in the same franchise system sold for recently? The franchisor may share this information, and franchise business brokers who specialize in specific brands maintain databases of comparable transactions. Resale multiples vary significantly by brand — a McDonald’s franchise commands a much higher multiple than a smaller, less established brand.

Due Diligence for Franchise Resales

Beyond standard franchise due diligence, resale purchases require additional investigation:

Financial Verification

• Request three years of tax returns (not just internal P&L statements). Tax returns are harder to manipulate than internal books.
• Obtain monthly revenue and expense reports to identify seasonal patterns and trends.
• Review bank statements to verify reported revenue matches actual deposits.
• Check for any outstanding tax obligations, liens, or judgments against the business.

Operational Assessment

• Visit the location at different times of day and days of the week to observe actual customer traffic and operations.
• Speak with key employees privately about the state of the business, morale, and any concerns.
• Inventory all equipment and assess its age, condition, and remaining useful life.
• Review the lease agreement thoroughly, including remaining term, renewal options, rent escalation clauses, and transfer provisions.

Franchisor Communication

• Ask the franchisor for their assessment of the unit’s performance relative to the system average.
• Inquire about any upcoming required remodels, equipment upgrades, or system changes that would require capital expenditure.
• Confirm the remaining franchise agreement term and renewal conditions.
• Understand whether the franchisor has a right of first refusal on the sale.

Financing a Franchise Resale

Franchise resales can be financed through several channels:

• SBA loans — The SBA 7(a) loan program finances franchise acquisitions, including resales. SBA loans offer favorable terms (10-25 year amortization, competitive rates) and typically require 10-20% down payment.
• Seller financing — The seller carries a note for a portion of the purchase price, typically 10-30%. This is common in franchise resales and has the added benefit of keeping the seller invested in a smooth transition.
• Conventional bank loans — Some banks lend on franchise resales, particularly for established brands with strong financial histories.
• Franchisor financing programs — Some franchise systems offer internal financing or have preferred lending relationships that facilitate resale transactions.

Negotiation Strategies for Franchise Resales

• Use declining metrics as leverage. If revenue has dropped year over year, the business should be priced accordingly — not based on peak historical performance.
• Negotiate an earnout. Pay a portion of the price based on the business achieving certain performance targets post-sale. This protects you if the seller’s representations prove overly optimistic.
• Request a transition period. The seller should agree to stay involved for 30 to 90 days after closing to facilitate knowledge transfer, introduce you to key customers and vendors, and support employee retention.
• Factor in capital expenditures. If the location needs a remodel, equipment replacements, or technology upgrades within the next two to three years, subtract those costs from your offer price.
• Negotiate the lease separately. If the lease is transferable, negotiate directly with the landlord for favorable terms before closing the franchise purchase.

Whether you choose a new franchise or a resale, the fundamental requirement is the same: thorough due diligence. A resale offers the advantage of verifiable historical data, but it also requires you to look carefully beneath the surface to understand what you are really buying.