Franchise resales: how to buy an existing franchise unit
Short answer
Buying a franchise resale means buying an operating unit from its current franchisee, with the franchisor's approval. Unlike a new unit, you can check the unit's own track record: its tax returns, P&Ls, bank deposits and POS data. You'll also need to meet the franchisor's buyer requirements, complete training, pay a transfer fee (often charged to the seller), and usually sign the franchisor's current franchise agreement, which may have different royalties, terms or remodel requirements than the seller's.
A resale gives you something a new franchise never can: this unit's real numbers. Use them. The franchisor's system averages and the seller's enthusiasm are no substitute for the unit's own tax returns and bank deposits.
Resale vs new unit
| Resale | New unit | |
|---|---|---|
| Track record | This unit's history | System averages only (if Item 19 provides any) |
| Ramp-up | None; open on day one | Months to build customers |
| Price | Includes goodwill | Franchise fee plus build-out |
| Location | Fixed; lease inherited | You choose (with approval) |
| Equipment, build-out | Used; may need remodel | New |
| Franchise agreement | Usually the current form, new term | Current form |
What to check
- The unit's own numbers: tax returns, monthly P&Ls, bank deposits, POS sales reports (franchisors often have them too). See proof of cash.
- Royalties and fees under the agreement you'll sign, not the seller's. Differences change earnings.
- Remodel or upgrade requirements triggered by transfer; get them in writing and price them.
- Transfer conditions (FDD Item 17; franchise agreement): approval criteria, training, fees, timelines.
- Territory and any planned new units nearby.
- The lease and its assignment, plus any franchisor requirements on lease terms.
- Other franchisees' experience: call several (Item 20 lists current and former franchisees).
Worked example: what the resale costs on top of the price
Illustrative example, not any brand's fees
You agree to buy a unit for $600,000. The franchisor's transfer conditions add: a transfer fee of $15,000 (here the agreement says the buyer pays), training for you and a manager with travel of $8,000, a required remodel of $120,000 within a year, and a technology upgrade of $12,000. The current franchise agreement charges a 6% royalty instead of the 5% in the seller's older agreement. On $1,200,000 of sales, that 1% is $12,000 a year more in fees. Your total project, before working capital and closing costs: $600,000 + $15,000 + $8,000 + $120,000 + $12,000 = $755,000. The unit's earnings also fall by $12,000 a year because of the higher royalty. If you priced the deal on the seller's P&L under the old agreement, you'd be paying for earnings you won't get.
Questions to ask the selling franchisee
- Why are you selling, and why now?
- How have sales and margins changed since you bought or opened the unit?
- What has the franchisor required of you in the last three years (remodels, technology, new products)?
- How do your numbers compare with the system's Item 19 figures?
- What support has been useful, and what hasn't?
- Have you had any disputes, defaults or notices from the franchisor?
Then ask the same questions of two or three other franchisees nearby, and compare the answers.
Red flags in franchise resales
- A unit whose sales lag the system median in the FDD's Item 19, with no clear reason.
- A seller who's in default of the franchise agreement or behind on royalties; the franchisor may require cures before transfer.
- High turnover in Item 20 for the brand, or many units in your area changing hands.
- A franchise agreement with little term left, so you'd face renewal costs soon.
- Required remodels or equipment changes nobody has priced.
- A territory that's been reduced, or new units planned nearby.
Documents to request
- The unit's tax returns, monthly P&Ls and bank statements for three years.
- POS sales reports and royalty and ad fund statements.
- The seller's franchise agreement and the current FDD with the agreement you'd sign.
- The franchisor's written transfer conditions, fees and required upgrades.
- Franchisor inspection and compliance reports for the unit.
- Lease, any franchisor lease rider, and landlord consent requirements.
- Staff roster, pay and tenure; equipment list and condition.
Questions to ask the franchisor
- What do you require of a buyer for approval, and how long does it take?
- Which agreement will I sign, and how does it differ from the seller's?
- What remodel, equipment or technology upgrades will you require at transfer, and by when?
- Is the seller in good standing, and are there any open defaults?
- Are any new units, or changes to the territory, planned nearby?
- Do you have a right of first refusal on this sale?
Financing
Lenders check the brand against the SBA Franchise Directory and underwrite the unit's history under the normal change-of-ownership rules. See SBA 7(a) for acquisitions. For the general franchise buying process, see buying a franchise.
Using royalty statements as a revenue check
A franchise resale has an advantage independent businesses don't: the franchisor's royalty and ad fund statements. Royalties are calculated as a percentage of reported sales, so twelve months of statements give you an independent sales figure to compare with the unit's POS reports, tax returns and bank deposits. Ask the seller for them (or the franchisor, with the seller's permission). If the unit's P&L shows higher sales than the royalty statements imply, either the seller underreported to the franchisor, which is a breach you don't want to inherit, or the P&L is overstated. Either way, it's a question to resolve before price.
Franchise transfer fee: what it covers and how a transfer works
A franchise transfer fee is a charge the franchisor collects when a franchise unit changes hands, to cover reviewing and approving the buyer, training and paperwork. The franchise agreement sets the amount and conditions; the FDD discloses it (fees in Item 6, transfer conditions in Item 17). The seller often pays it, but who pays is negotiable between buyer and seller.
Transfers usually also require the buyer to meet the franchisor's criteria, complete training, sign the current franchise agreement and sometimes remodel.
The transfer fee is usually a small part of a resale's cost. The transfer process around it can be the slowest part of the deal, so start it early.
Typical transfer steps
- Seller notifies the franchisor of the proposed sale.
- Franchisor exercises (or waives) any right of first refusal.
- Buyer applies: financial statements, background, experience, interviews.
- Franchisor approves, possibly with conditions (remodel, upgrades).
- Buyer completes training.
- Buyer signs the current franchise agreement; seller signs releases; transfer fee paid.
- Closing of the business purchase.
Costs beyond the fee
- Remodel or equipment upgrades required as a condition of transfer.
- Training travel and time.
- Differences between the seller's agreement and the current form (royalty rate, ad fund, tech fees).
Price these into your offer.
Your timeline will include the franchisor's
A resale has two approval tracks running at once: your lender's and the franchisor's. The franchisor will usually want an application, a financial review, an interview and completion of its training program before it consents to the transfer. Ask the franchisor at the start how long each step usually takes, whether training has a fixed schedule, and whether any remodel or equipment upgrade will be required as a condition of transfer. Build those into the closing date in your LOI, and make franchisor approval a condition of closing in the purchase agreement, so you are not bound to buy a unit you cannot operate under the brand.
Before closing, ask the franchisor for the unit's most recent inspection or field visit reports. They show what the brand already thinks needs fixing, and what you will be asked to fix first.
Frequently asked questions
Is buying an existing franchise better than opening a new one?
It removes the ramp-up uncertainty, because the unit has history you can verify. You pay for that history with goodwill, and you inherit the location, staff and equipment as they are.
Does the franchisor have to approve the sale?
Almost always. Item 17 of the franchise disclosure document describes transfer conditions; the franchise agreement controls.
Will I get an FDD on a resale?
Whether the franchisor must provide one depends on the circumstances, but ask for the current FDD anyway. You'll usually sign the current franchise agreement, and the FDD tells you the system's fees, litigation and outlet turnover.
Can I use an SBA loan for a franchise resale?
Often yes, subject to SBA change-of-ownership rules and the brand's eligibility; SBA maintains a Franchise Directory that lenders check.
Who pays the franchise transfer fee?
The franchise agreement may assign it to the seller, but buyers and sellers can agree otherwise in their purchase agreement. Clarify it in the LOI.
Where is the transfer fee disclosed?
In the FDD, typically Item 6 (other fees), with transfer conditions summarized in Item 17.
Sources
- FTC Franchise Rule, 16 CFR Part 436 (eCFR)
- SBA: Franchise Directory
- SBA: Buy an existing business or franchise
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.