Buying an Existing Franchise: What to Check and How to Fund It

Resale vs. new franchise: what changes

A resale comes with customers, staff, equipment and a financial record. You pay for that head start, and you take on the unit's history as well.

A new franchise starts from zero: build-out, hiring, grand opening, then a slow ramp. A resale is already operating, so cash flow can begin on day one. You can check real sales, costs and trends.

The tradeoffs are real. The price includes goodwill. Equipment may be aging. The lease may be near renewal. Staff may leave with the old owner. The franchisor may require upgrades or remodels as a condition of approval or renewal.

Also note that you will usually sign the franchisor's current agreement, which can differ from the seller's older terms. Read it as a new deal.

Read the Franchise Disclosure Document

The FDD is the franchisor's legal disclosure. Read it fully, especially fees, restrictions, litigation, unit counts and the financial statements.

U.S. franchisors must provide an FDD to prospective buyers. Review it with a franchise attorney. Focus on:

• Fees: initial and transfer fees, royalties, marketing fund contributions, technology fees.
• Restrictions: approved suppliers, territory, pricing rules, renewal and termination terms.
• Litigation and bankruptcy history.
• Unit turnover: how many outlets opened, closed, transferred or were terminated recently.
• Financial performance representations, if the franchisor provides them.

Call current and former franchisees listed in the FDD and ask about support, real costs and whether they would buy again. For costs by brand, see average franchise fees.

Examine the unit's financials

Ask for three years of profit and loss statements, tax returns, bank statements and sales reports, and verify them against each other.

Seller-prepared numbers may be flattering. Ask for source documents and compare:

1. Tax returns against profit and loss statements.
2. Bank deposits against reported sales.
3. Point-of-sale reports against both.
4. Payroll records against labor costs.
5. Royalty and marketing fund payments against sales.

Look for owner add-backs, such as the seller's salary or personal expenses run through the business, and decide which are real. Build your own version of cash flow with owner pay at the level you need. See determining business market value and business valuation methods for how price is derived.

Check the site, lease, equipment and staff

Inspect the location, review the lease term and assignment rights, list equipment age and condition, and find out who runs the unit day to day.

A strong P&L cannot fix a bad lease. Confirm remaining term, renewal options, rent escalations and whether the landlord consents to assignment. Check zoning and permits.

Inventory equipment with age, maintenance records and expected replacement costs. Franchisors often require current brand standards, so a remodel may be due soon. Ask for the franchisor's remodel requirements in writing.

Meet the manager and key staff. Learn which employees are likely to stay and whether wages are in line with local rates. Check that licenses and health or safety inspections are current.

Franchisor approval and the transfer process

Most franchisors must approve a buyer. Expect an application, financial review, training and a transfer fee, and a right of first refusal in some agreements.

The sale usually requires the franchisor's written consent. They look at your financial strength, experience and willingness to follow the system. They may require training and a signed new agreement.

Timeline matters. Ask early how long approval takes, what the transfer fee is and whether the franchisor can exercise a right of first refusal. Make your purchase agreement contingent on approval, financing and lease assignment.

Hire an attorney to handle the purchase agreement and confirm what is included: assets, inventory, liabilities, non-compete, training and transition help from the seller.

Funding the purchase honestly

Buyers often combine a down payment, seller financing and a bank or SBA loan. Plan for working capital and any required remodel on top of the price.

Typical sources include your own cash, seller financing, SBA 7(a) loans and bank loans. SBA lenders have franchise-specific requirements, and the SBA maintains guidance on franchise eligibility. Check current SBA rules. See how to buy a business with an SBA loan.

Be clear about what ROI Funder does and does not do. We do not place acquisition loans for buying a business. ROI Funder considers operating businesses with 6+ months in operation and $20,000+ in monthly revenue for working capital, equipment and similar needs. After you own the unit and it is running, working capital or equipment financing may help with remodels, equipment replacement and seasonal cash needs.

See also business acquisition basics.

Red flags and a pre-signing checklist

Walk away or renegotiate if numbers do not reconcile, the lease is weak, the unit has high turnover or the seller will not share documents.

Red flags:

• Financials that do not match tax returns or bank deposits.
• Sales declining while costs rise.
• A lease expiring soon without renewal rights.
• Many units in the system recently closed or transferred.
• Pending franchisor disputes or required remodels with no cost estimate.

Before you sign: verified three years of numbers, FDD reviewed by an attorney, franchisee calls done, lease assignment confirmed, franchisor approval in writing, funding committed and enough working capital for the first six months. Consider the best and worst franchises to buy guide when comparing brands.