Buying a Franchise Resale: How to Evaluate an Existing Unit

Why Consider a Franchise Resale?

Starting a franchise from scratch means finding a location, building out the space, hiring staff, marketing to a cold market, and surviving 12-18 months of startup losses. Buying an existing franchise unit (a “resale”) lets you skip much of that.

A resale franchise comes with:

• Existing revenue — The business is already generating income
• Established customers — You inherit a customer base
• Trained staff — Employees are already in place and trained
• Proven location — The real estate is validated by actual performance
• Operating history — You can review actual financial statements, not projections

According to Item 20 data in our database of 1,609 FDDs, franchise transfers happen regularly. Every transfer represents someone selling their franchise unit to a new buyer — and a potential resale opportunity for you.

Where to Find Franchise Resales

Item 20 Transfer Data

The FDD tracks transfers — franchises that changed ownership during each fiscal year. A high transfer rate in a franchise system means:

• An active resale market exists
• The brand has enough value that units command a sale price
• There are regular opportunities to enter the system through resale

Other Sources

Source	What It Offers
Franchisor’s internal listing	Some franchisors maintain lists of units available for sale
BizBuySell.com	Largest online marketplace for business-for-sale listings
Franchise brokers	Specialize in matching buyers with available franchise resales
Direct outreach	Contact franchisees in your target market — some may be willing to sell
Franchisee networks	Existing franchisees often know who is considering an exit

How to Value a Franchise Resale

Valuing a franchise resale is different from valuing an independent business. You’re buying both a business and the right to continue operating under the franchise agreement.

Key Valuation Methods

1. Multiple of Earnings (Most Common)

The most widely used method applies a multiple to the franchise’s annual earnings:

Metric	Typical Multiple	Result
Seller’s Discretionary Earnings (SDE)	2.0x – 3.5x	For owner-operated single units
EBITDA	3.0x – 5.0x	For manager-run or multi-unit operations
Revenue	0.3x – 0.8x	Less common; used when earnings are unclear

Example: A franchise resale generating $150,000 in annual SDE (owner’s total economic benefit including salary, benefits, and add-backs) valued at a 2.5x multiple would have an asking price of approximately $375,000.

2. Asset-Based Valuation

For franchises with significant tangible assets:

Asset Category	Valuation Approach
Equipment	Fair market value (depreciated replacement cost)
Inventory	Cost or liquidation value
Leasehold improvements	Remaining useful life / lease term
Goodwill	Earnings multiple minus tangible asset value

3. Comparable Sales

Review what similar franchise units in the same system have sold for. Ask the franchisor or franchise broker for recent comparable transactions.

What Affects Resale Value

Factor	Higher Value	Lower Value
Revenue trend	Growing year over year	Declining or flat
Remaining lease term	5+ years remaining	Less than 2 years
Franchise agreement term	7+ years remaining	Approaching renewal
Location quality	High-traffic, prime site	Off-path, declining area
Equipment condition	Modern, well-maintained	Aging, needs replacement
Staff quality	Experienced, stable team	High turnover
Customer reviews	4.5+ stars	Below 4.0 stars
Reason for sale	Retirement, relocation	Financial distress

The FDD’s Role in Resale Transactions

Item 17: Transfer Provisions

Item 17 of the FDD governs how franchise transfers work. Key provisions include:

Franchisor approval — Nearly all franchise agreements require the franchisor to approve the buyer. You’ll need to go through the franchisor’s standard qualification process.

Right of first refusal — Many franchisors reserve the right to match any third-party offer and buy the unit themselves. This can complicate negotiations because the seller can’t guarantee the deal will close with you.

Transfer fee — Most franchisors charge a transfer fee, typically $5,000-$25,000. This covers the cost of evaluating the new buyer, updating records, and providing transition training.

Training requirement — You’ll likely be required to complete the franchisor’s standard initial training program, even though you’re buying an existing unit.

Franchise agreement — You may be required to sign the franchisor’s current franchise agreement (which may differ from the seller’s original agreement). This is similar to the “then-current” issue at renewal — the terms you sign may include higher fees or different obligations.

Item 20: Historical Transfer Data

Check Item 20 to see how many transfers have occurred in the franchise system over the past three years. A system with regular transfers has an active resale market. A system with zero transfers may have restrictive transfer provisions or an inability for franchisees to exit profitably.

Due Diligence Checklist for Franchise Resales

Financial Review

• Request 3 years of tax returns from the seller
• Review 3 years of profit and loss statements
• Analyze monthly revenue trends (not just annual totals)
• Verify the seller’s claimed Seller’s Discretionary Earnings with documentation
• Identify all add-backs and one-time expenses
• Review accounts receivable and accounts payable
• Check for any outstanding debts, liens, or judgments

Operational Review

• Visit the unit during peak and off-peak hours
• Interview key employees (with seller’s permission)
• Review customer reviews on Google, Yelp, and industry sites
• Check equipment condition and maintenance records
• Review the current lease terms (rate, expiration, renewal options, assignment provisions)
• Assess the local competition
• Confirm the condition of any vehicles, if applicable

Franchise-Specific Review

• Read the current FDD for the franchise system (request from the franchisor)
• Review the seller’s original franchise agreement
• Understand what agreement you’ll be required to sign
• Confirm the transfer fee amount
• Verify any territory changes that may apply to the transfer
• Ask the franchisor about the unit’s compliance history
• Confirm training requirements and timeline

Legal and Professional

• Hire a franchise attorney to review all transfer documents. Follow a thorough due diligence checklist
• Engage a CPA to verify financial statements
• Obtain a business valuation from an independent appraiser (for deals over $500K)
• Review the lease assignment provisions with a real estate attorney
• Verify all required licenses and permits will transfer

Why Sellers Sell: What to Ask

The seller’s motivation reveals a lot about the opportunity. Here are common reasons and what they signal:

Reason	Signal	Risk Level
Retirement	Neutral to positive — natural exit	Low
Relocation	Neutral — personal decision	Low
Health issues	Neutral — involuntary exit	Low-Medium
Partnership disputes	Investigate — may indicate business problems	Medium
”Ready for something new”	Possible dissatisfaction — dig deeper	Medium
Financial difficulty	Red flag — why is the business struggling?	High
Franchisor conflict	Red flag — are the issues systemic or personal?	High

Always ask the seller: “If you were 10 years younger and in perfect health, would you keep this business?” The answer tells you whether they’re leaving because they want to or because they have to.

Common Resale Mistakes

1. Paying Based on Revenue, Not Earnings

A franchise doing $1 million in revenue and $50,000 in profit is worth far less than one doing $700,000 in revenue and $150,000 in profit. Always value based on earnings, not revenue.

2. Ignoring the Remaining Franchise Term

If the franchise agreement expires in 2 years, you face renewal uncertainty. You may need to sign a new agreement with different terms, pay a renewal fee, or even bring the facility up to current brand standards (which can cost $50,000-$200,000+).

3. Skipping Validation

Even though you’re buying an existing unit, you should still call other franchisees in the system. Ask about the franchisor’s support, the brand’s direction, and whether they would recommend the franchise.

4. Not Negotiating the Lease Assignment

Your lease is as important as your franchise agreement. Verify that the landlord will assign the lease to you at the current rate and terms. If the lease is expiring soon, negotiate a new lease before closing the purchase.

5. Overlooking Capital Expenditure Needs

The seller may have deferred maintenance or equipment upgrades. Inspect everything and budget for any immediate capital needs:

Item	Replacement Cost
HVAC system	$15,000 – $40,000
Kitchen equipment (restaurant)	$20,000 – $100,000
Signage and exterior	$10,000 – $50,000
Flooring and interior	$15,000 – $75,000
Technology/POS upgrade	$5,000 – $20,000

Financing a Franchise Resale

Resales are often easier to finance than new units because:

• Historical financial data makes lending decisions more straightforward
• The proven revenue stream reduces lender risk
• SBA lenders prefer businesses with operating history
• The business can serve as its own collateral

SBA 7(a) loans are commonly used for franchise resales with the same terms as new unit financing (10-20% down, 10-year terms for goodwill and working capital, 25 years if real estate is included).

The Resale Advantage

Buying an existing franchise unit is one of the smartest entry strategies in franchising. You trade the risk of a cold start for the certainty of existing revenue, proven location, and trained staff. The key is rigorous due diligence: verify the financials, understand the franchise agreement terms, evaluate the remaining lease, and ensure the asking price is justified by actual earnings — not optimistic projections.