Buying a Franchise Resale With an SBA Loan: Transfer Approval, the Directory and the Numbers

A franchise resale is two deals at once: one with the seller for the business, and one with the franchisor for the right to run it. The franchisor's approval, its transfer terms and its place on the SBA's Franchise Directory decide whether the first deal can close, so work on both from the start.

Check the Franchise Directory first

If the brand meets the FTC definition of a franchise, the SBA can only finance it when the brand is listed on the SBA Franchise Directory, and the lender has to check before it approves the loan (the Franchise Directory). Look the brand up before you sign a letter of intent. If it is not listed, the franchisor can apply, but that takes time a purchase agreement may not give you. Our franchise pages show how often each brand has been SBA financed.

Read the transfer terms

Item 17 of the franchise disclosure document sets out the rules for renewal, termination and transfer: whether the franchisor must approve you, the conditions for that approval, and whether the franchisor has a right of first refusal to buy the business itself. Some franchisors require a buyer to sign the current form of franchise agreement rather than take over the seller's, which can change the royalty, the term and the territory. Ask for the exact agreement you will sign.

The lender needs a copy of the signed franchise agreement and every other document the franchisor requires you to sign (buying a franchise). Compare the agreement's remaining term with the loan term, and if it ends first, look at the renewal terms in the same Item 17.

Price the remodel before you agree the price

A franchisor may require a remodel, new equipment or a new point-of-sale system as a condition of the transfer. Get the list in writing and price it. Equipment and leasehold improvements are eligible uses of 7(a) proceeds (leasehold improvements), so required upgrades can be part of the project, but they add to the total that your down payment is measured against.

Underwrite the unit, not the brand

A resale has its own history, and the lender underwrites from this unit's tax returns, not from the brand's averages. Reconcile the point-of-sale reports to the bank deposits and the returns. Then read the disclosure document for context. Item 19 gives financial performance figures if the franchisor chooses to make them (it does not have to). Item 20 shows, for the last three years, how many outlets opened, closed, were terminated and were transferred to new owners. A brand where many units are changing hands deserves a question about why.

Above a $350,000 business price, the lender orders an independent business valuation (valuation), and the loan cannot exceed what that valuation supports.

The down payment and the seller

Buying an existing franchise is a change of ownership, so the minimum down payment is 10% of the total project (down payment), and up to half of it can be a seller note on full standby (seller note). A seller earnout is not allowed (earnouts). In a full buyout the seller cannot stay on as an owner or employee, though the business can retain them as a consultant for up to 24 months (the seller rule). Check the transfer section too, because some franchisors set their own transition requirements.

Resale or new unit?

A resale has a track record the lender can underwrite. A new unit is a start-up, judged on projections and your experience, with the same 10% minimum down payment. If you are weighing the two, send us the listing and the brand: we will tell you how a lender is likely to see each, at no cost to you.