Franchise Resale Financing
SBA 7(a) for buying existing franchise locations — 10% down, seller note flexibility, proven cash flow underwriting. Single-unit, partner buyout, and multi-unit acquisitions.
Franchise resale financing — buying an EXISTING franchise location instead of opening a new one — typically uses SBA 7(a) at 90% LTV (10% down). Lenders underwrite the location's actual trailing 12-24 month cash flow. Closing takes 60-90 days. Seller notes on full standby reduce effective buyer cash to 5%. Multi-unit resales up to $5M qualify for single SBA 7(a) loan.
Why SBA 7(a) Dominates Franchise Resales
Franchise resale = buying an existing operating location from the current franchisee. The single dominant financing structure is SBA 7(a). Three reasons:
1. **Loan-to-value advantage.** 90% LTV including goodwill (vs 70-75% conventional). On a $1M location, that's $100K buyer cash vs $250-300K conventional.
2. **Cash-flow underwriting.** SBA lenders underwrite trailing 12-24 month actual cash flow at the location — no projection guesswork like ground-up franchises. If the location made $250K SDE last year, the lender knows it'll likely make $200-275K next year.
3. **Seller financing flexibility.** SBA allows 5% standby seller note to count toward the 10% down requirement, dropping practical buyer cash to 5%. Conventional banks typically don't allow this.
Structure: 90% SBA + 5% Standby Seller Note + 5% Buyer Cash
Most aggressive standard franchise resale structure stacks like this:
**$1.0M purchase price example:** - $900K SBA 7(a) loan, 10-year amortization on goodwill, 25 years on real estate (if included), Prime + 2.75% rate (approx. 11.0% April 2026) - $50K seller note, full standby for 2 years (no payments during standby), 8% interest, balloon at year 7 - $50K buyer cash equity
**Buyer total cash to close:** $50K + closing costs (~$15-25K legal, appraisal, valuation, SBA fee). Total ~$65-75K cash.
**Buyer monthly debt service (year 1):** ~$12,400 SBA P&I (assuming 10-yr amort on full loan at 11%). Seller note $0 during standby.
With $250K SDE on the location, monthly cash flow available for debt service is ~$20,800. After SBA debt service of $12,400, remaining $8,400/month covers operating draws + reserve building. DSCR ~1.68x — comfortable for SBA underwriting (1.20x is the SBA floor).
Multi-Unit Resales (Partner Buyouts, Portfolio Acquisitions)
SBA 7(a) supports multi-unit acquisitions up to $5M. Common scenarios:
**Partner buyout:** Operator buys out a partner's interest in 2-5 existing locations. Structure: SBA 7(a) refinances existing senior debt + provides cash to selling partner. The remaining operating partner becomes 100% owner. Common with operating partners separating after years of joint ownership.
**Portfolio acquisition:** Experienced multi-unit operator buys 3-7 existing locations from a retiring or downsizing operator. Each location's cash flow contributes to consolidated DSCR. Standard structure: single SBA 7(a) loan, 10-year amortization on goodwill, real-estate-secured collateral on owned properties.
**Above $5M (SBA cap):** Deal splits. SBA 7(a) for the goodwill + working capital portion ($5M cap). SBA 504 or conventional CRE loan for the real estate portion (no SBA cap). Private credit or family office bridge for any gap above SBA + conventional. Common pattern for multi-state QSR portfolios.
**Brand-specific dynamics:** Quick-service restaurant chains (Subway, Dunkin', Dairy Queen, Sonic) trade at 2.5-4x SDE. Casual dining (Applebee's, Buffalo Wild Wings, Chili's) trade at 3-5x SDE. Service brands (UPS Store, Snap-on Tools) trade at 3-5x SDE. Goodwill underwriting cap depends on brand norms.
Diligence Items That Kill Resale Deals
Most franchise resale LOIs that don't close fail at one of these diligence items:
**Trailing financials.** Seller's tax returns must reconcile to internal P&L within ~5%. Material discrepancies (e.g., $50K cash transactions not on returns) blow up the goodwill underwriting because lender can only count tax-return-reported income.
**Franchisor consent.** Most franchise agreements require franchisor approval of any ownership transfer. Some franchisors (McDonald's most famously) actively manage transfers and may decline a buyer they don't approve. Get franchisor LOI/conditional approval BEFORE financing diligence — financing approval is wasted if franchisor declines transfer.
**Lease assignment.** Most franchise locations operate on a leased premise. Landlord must consent to lease assignment to new operator. Some landlords use this consent to demand rent increases or term extensions. Negotiate lease assignment terms early — landlord leverage is highest when financing is committed.
**Equipment + real estate condition.** SBA appraisals + valuations require physical inspection. Material deferred maintenance ($100K+ HVAC replacement, kitchen equipment at end of life) reduces appraised value and can force seller to credit at closing or buyer to bring more cash.
**Existing debt at the location.** Seller may have existing equipment loans, working capital lines, franchise development debt. These all need payoff at closing. Confirm with seller's current lender BEFORE LOI — surprise debt at closing has killed many deals.
When Conventional or Private Credit Beats SBA
SBA 7(a) is dominant on franchise resales, but not always optimal:
**Above $5M:** SBA 7(a) capped. Use SBA 504 (real estate) + conventional or private credit for goodwill. Or skip SBA entirely and use conventional CRE + working capital line + private credit subordinate debt.
**Buyer with weak personal financial profile.** SBA requires personal guarantee from any 20%+ owner. If guarantor's PFS is weak (high existing debt, prior bankruptcy, low net worth), SBA may decline despite good location cash flow. Solution: bring stronger guarantor as co-borrower, or use private credit which underwrites cash flow + collateral without personal guarantee weight.
**Time-sensitive close.** SBA 7(a) closes in 60-90 days standard, 45-60 with PLP lender. If seller insists on 30-day close (often when seller has competing buyers or estate situation), conventional bank or private credit closes faster.
**Borrower already has SBA exposure.** SBA's $5M aggregate cap counts ALL the borrower's SBA loans. If the borrower already has $4M of SBA debt across other businesses, only $1M new SBA capacity is available. Conventional or private credit fills the gap for additional acquisitions.
For PeerSense engagement on franchise resales: we run SBA 7(a) + conventional + private credit options in parallel and present buyer with structure comparison. No retainer; lender pays at closing.
Questions About This Topic
What is franchise resale financing?+
Franchise resale financing is debt financing used to buy an EXISTING franchise location from the current operator, rather than opening a new one. SBA 7(a) is the dominant structure: up to 90% LTV (10% down), 10-year amortization on goodwill + 25 years on real estate, government-guaranteed. The key advantage over startup franchise financing: lenders underwrite the actual historical cash flow of the location, not a projection.
What is the typical down payment for a franchise resale?+
10% minimum under SBA 7(a) — but 5% can come from a seller note on full standby (no payments during SBA loan term). So practical buyer-cash down payment is often 5-7.5%. Conventional bank financing on franchise resales typically requires 25-30% down, no seller note allowed. SBA Express (faster but smaller) allows up to $500K with similar 10% down.
How long does SBA franchise resale financing take to close?+
Typical SBA 7(a) franchise resale closes in 60-90 days from full application. Faster than ground-up franchise builds because the location is already operating — no construction draws, no franchisor build-out approval, no opening-period working capital needs. PLP (Preferred Lender Program) lenders close fastest, often in 45-60 days. SBA Express closes in 30-45 days for deals under $500K.
Can I use a seller note for franchise resale financing?+
Yes — seller notes are common and SBA-allowed. Two structures: (1) Full standby seller note for up to 2 years, where seller receives no payments until then — counts as equity for SBA's 10% down requirement, so effective buyer cash can drop to 5%. (2) Amortizing seller note paid alongside SBA loan, but doesn't count toward equity. Most aggressive structures combine 5% buyer cash + 5% standby seller note + 90% SBA = 0% buyer cash, 5% effective down.
How do lenders underwrite goodwill on franchise resales?+
SBA lenders finance up to 90% LTV including goodwill — but the goodwill amount must be supported by trailing 12-24 month cash flow. Standard underwriting: SBA-quality business valuation by certified appraiser using SDE (Seller's Discretionary Earnings) or EBITDA multiple appropriate for the franchise brand. If the asking price implies a goodwill multiple materially above industry norm (e.g., 5x SDE on a brand that typically trades at 3x), lender will reduce eligible loan amount or decline.
Can I buy multiple franchise locations under one SBA loan?+
Yes — SBA 7(a) supports multi-unit acquisitions up to the program's $5M cap. Common structure: experienced multi-unit operator buys 3-7 existing locations from a retiring or partnering-out operator. Each location's cash flow contributes to consolidated DSCR. Above $5M, deals route to SBA 504 + conventional or private credit. Multi-unit resales often get tighter pricing than single-unit due to operational diversification.
Editorial integrity: Published by PeerSense Capital Advisory · Written by Ed Freeman, Founder. PeerSense is a capital advisory firm, not a lender. Content is for educational purposes and does not constitute financial, legal, or tax advice. Rates and terms cited reflect approximate April 2026 market conditions and may not reflect current conditions at the time of reading. Consult a qualified financial professional for transaction-specific guidance.