Franchise Financing and Financial Health: How Buyers Underwrite (and How Sellers Pre-Qualify)

Key Takeaways

• SBA 7(a) is the dominant franchise financing tool. 10 to 25 percent down, 10-year term, prime + 1.5 to 3 percent rate. Most franchise resales close on 7(a)
• ROBS financing lets buyers use 401k assets without tax penalty but adds compliance complexity. Best for buyers with $250K+ in retirement assets
• Franchisor financing exists at specific brands (UPS, Servpro, some hotels) but is not a primary financing source. Treat it as supplemental
• FDD Item 19 is not a substitute for unit-level diligence. The system average tells you nothing about whether the target unit performs at, above, or below average
• Royalty payment history is the most reliable revenue verification. If royalties paid match reported revenue at the contractual rate, the revenue is real
• Sellers can pre-qualify their unit by running the same metrics buyers will: comparable performance, clean compliance, current royalties, manageable capex backlog

Part A: Financing options for franchise buyers

Franchise buyers have five financing paths. Each path has a specific use case and a specific approval profile. Buyers who understand which path fits their situation move faster and close deals with better terms.

Path 1: SBA 7(a) loan

The dominant franchise financing tool. Loan amounts up to $5M. 10-year amortization for business acquisition. Rate is prime + 1.5 to 3 percent (currently around 9 to 11 percent depending on size and risk profile). 10 to 25 percent down depending on the deal.

Requirements: franchise must be on the SBA Franchise Directory; buyer must have relevant operating experience or strong business background; clean credit history (score above 680); enough liquid assets for down payment plus working capital; personal guarantees from all owners with 20 percent or more equity.

Best for: most franchise resales, multi-unit acquisitions under $5M, buyers with $100K to $1M in liquidity.

Path 2: SBA 504 loan

Used when the franchise acquisition includes real estate. 504 is structured as 50 percent first-position bank loan plus 40 percent SBA-guaranteed second-position loan plus 10 percent down. The bank loan finances real estate; the SBA portion finances additional assets. Longer amortization (up to 25 years for real estate).

Best for: franchise deals with significant real estate (owner-occupied building, drive-thru lot, hotel property). Less common for typical QSR resales where the buyer assumes a lease rather than owning real estate.

Path 3: Conventional bank loan

Outside the SBA program. Bank takes full risk. Requires stronger collateral, larger down payment (typically 25 to 35 percent), shorter term (5 to 7 years), faster amortization, lower interest rate than SBA in some cases.

Best for: experienced multi-unit operators with strong balance sheets buying additional units. Conventional financing makes sense when the buyer can negotiate better terms than SBA based on credit strength.

Path 4: Franchisor financing

Some franchisors provide financing for new franchisees, either directly or through preferred lender programs. Examples: UPS Store has historically offered financing programs and reduced royalty schedules for new franchisees. Servpro offers financing for territory acquisitions. Major hotel brands often coordinate with preferred lenders to streamline financing for new operators.

Best for: brands that actively use financing as a sales tool. The terms vary widely: some are real loans at competitive rates; some are deferred-payment structures (defer franchise fee for 12 months); some are preferred lender introductions, not direct loans.

Path 5: ROBS (rollover for business startup)

Uses retirement assets to fund the business without triggering tax or early withdrawal penalties. Mechanics: the buyer rolls 401(k) or IRA into a new 401(k) plan sponsored by the new business; the new 401(k) invests in stock of the operating company; the buyer accesses retirement assets as equity in the business without taking a distribution.

Requirements: minimum $50K to $75K in retirement assets to make economic sense; willing to set up new C-corp structure; annual compliance and 5500 filings; willing to take on the audit risk if challenged.

Best for: buyers with $250K+ in retirement assets who want to deploy capital without taking a taxable distribution. Less attractive when the buyer can fund the down payment from non-retirement sources.

Path 6: Seller financing

Common in resales, rare in new units. Seller holds back 10 to 30 percent of the purchase price as a note paid by the buyer over 2 to 5 years. Interest rate typically 6 to 10 percent. Note is subordinated to the SBA lien.

Why sellers offer it: bridges the SBA approval amount and the actual purchase price; demonstrates seller confidence in the business; can shift more risk to the seller in exchange for higher price.

Why buyers want it: reduces cash needed at close; aligns seller incentive with post-close performance; provides a workout mechanism if performance falls short.

SBA restrictions on seller notes: SBA requires seller notes to be on standby (no payments) for the first 2 years in some cases, or to be subordinated and structured according to specific terms. The lender will require the seller note to be SBA-compliant.

For more on SBA mechanics, see SBA loans for business acquisition and best SBA 7(a) lenders.

Why SBA 7(a) dominates franchise lending

The SBA 7(a) program is structured for the exact transaction profile of a franchise acquisition: a buyer with operating capacity but limited capital, a business with cash flow but limited collateral, and a deal size of $250K to $5M. The 10-year amortization fits franchise cash flow patterns. The SBA guarantee gives lenders confidence to make loans they would not make on conventional terms. Most national SBA lenders have dedicated franchise underwriting teams who know the major brands and can move fast on approved systems.

How down payment requirements work

SBA 7(a) typically requires 10 to 25 percent down depending on the deal and the franchise. The minimum 10 percent down (sometimes lower) applies when there is strong collateral, strong operator experience, or strong cash flow. The 25 percent down applies to startups, weak collateral, or first-time operators. For most franchise resales, expect 15 to 20 percent down. The down payment must be from the buyer’s documented sources: cash savings, 401k rollover, gift from family, or seller financing (with restrictions).

SBA Franchise Directory: the gating question

Before pursuing SBA financing for any franchise, the buyer must confirm the brand is on the SBA Franchise Directory. This is the gating question; without directory listing, the deal becomes significantly harder.

How to check:

Go to the SBA website. Search the Franchise Directory by brand name. The directory shows brand name, SBA franchise identifier code, and certification status (certified or under review).

What buyers should do early:

Confirm the target brand’s directory listing before submitting LOI. If the brand is not on the directory, ask the franchisor’s development team whether they are working on certification. If not, expect SBA financing to be difficult.

Why this matters:

The directory is a binary gate. On the directory: SBA financing is available with standard timing. Off the directory: SBA financing is possible but requires special review, additional time, and additional documentation. Many lenders will not bother with off-directory deals because the process is too time-consuming.

Examples of major franchises on the directory:

Subway: on directory

McDonald’s: on directory

Dunkin: on directory

Five Guys: on directory

UPS Store: on directory

Servpro: on directory

Crumbl Cookies: on directory

Most established franchise brands are on the directory. New or emerging brands may not be, especially in the first 2 to 3 years after launch.

Workaround for off-directory brands:

If the buyer wants an off-directory brand, the lender can submit a Franchise Findings Form to the SBA for review. This process takes 30 to 60 days and is not guaranteed to result in approval. The lender will require additional documentation: the franchise agreement, the FDD, certifications from the franchisor. The cost of this process is typically passed to the buyer.

Alternative: pursue non-SBA financing for off-directory brands. Conventional bank loans, ROBS, or franchisor financing may be available even when SBA is not.

What the directory is

The SBA Franchise Directory is the official SBA list of franchise brands that have been pre-reviewed for SBA loan eligibility. The directory is maintained by the SBA and updated regularly. A brand on the directory has been reviewed for: franchise control over the franchisee (cannot be too restrictive), economic substance (real business not a license scheme), and standard disclosure compliance. Brands on the directory can be financed under SBA 7(a) and 504 programs without additional brand-level review at the loan level.

What happens if the brand is not on the directory

Brands not on the directory can still be financed under SBA, but the lender must conduct a franchise-specific review and submit additional documentation. This adds 30 to 60 days to the approval timeline and increases the risk of denial. New or niche brands often face this issue. Buyers considering off-directory brands should confirm the lender’s willingness to underwrite before committing to the franchise. Many lenders simply decline off-directory deals to avoid the additional work.

ROBS financing: how 401k rollover works in practice

Rollover for Business Startup (ROBS) is the technical name for using retirement assets to fund a business without triggering tax or early withdrawal penalties. ROBS has been around for decades and is widely used for franchise acquisitions where the buyer has substantial 401(k) or IRA assets.

When ROBS makes sense:

Buyer has $250K+ in retirement assets. Below that, the compliance cost makes the structure inefficient.

Buyer is willing to invest retirement savings in the business. ROBS assets are at business risk; if the business fails, the retirement assets fail with it.

Buyer cannot fund the down payment from non-retirement sources. If the down payment is available from cash savings, ROBS adds complexity without benefit.

Buyer is willing to set up a C-corp structure. ROBS requires C-corp; LLC will not work.

Buyer can manage the compliance burden. Annual 5500 filing, stock valuation, plan administration.

When ROBS does not make sense:

Down payment is available from other sources (savings, family, seller financing). The added complexity is not worth it.

Business is risky or untested. Retirement assets are protected from creditors and bankruptcy; investing them in a business removes that protection.

Buyer is close to retirement age. The opportunity cost of business failure is higher when retirement is near.

Buyer prefers LLC structure. ROBS requires C-corp.

How ROBS works step by step:

Step 1: Buyer engages a ROBS provider (specialty firm that handles structure setup and compliance). Setup cost typically $4K to $6K.

Step 2: ROBS provider establishes a new C-corp that will operate the business.

Step 3: C-corp sponsors a new 401(k) plan.

Step 4: Buyer rolls existing 401(k) or IRA assets into the new 401(k) plan. No tax, no penalty.

Step 5: The new 401(k) plan purchases stock in the C-corp. The C-corp now has cash; the 401(k) now owns the C-corp stock.

Step 6: C-corp uses cash to fund the business (franchise fee, working capital, down payment for SBA loan).

Step 7: Annual compliance: Form 5500, stock valuation, plan administration.

Combining ROBS with SBA:

ROBS is often combined with SBA 7(a). The ROBS provides equity (down payment, working capital); the SBA provides debt (purchase financing). On a $500K franchise acquisition, the structure might be: $150K ROBS equity + $350K SBA loan. The buyer accesses $150K of retirement assets and finances the rest. This is the most common ROBS structure in franchise acquisitions.

Risks to understand:

Business failure means retirement loss. ROBS assets are at business risk. If the franchise fails, the buyer loses retirement savings.

IRS audit risk. ROBS structures are legal but receive IRS scrutiny. A poorly structured or maintained ROBS plan can be unwound, triggering taxes and penalties retroactively.

Employee 401(k) participation. The 401(k) plan must offer participation to eligible employees. This creates an ongoing employee benefit cost.

Stock valuation. Annual valuation of the C-corp stock is required. As the business grows, the buyer’s retirement plan holdings grow; if the business shrinks, the plan holdings shrink.

Reputable ROBS providers: Guidant Financial, Benetrends, FranFund, MySolo401k. All offer franchise-specific structures and ongoing compliance services.

The legal structure

ROBS uses a specific legal structure: the buyer establishes a new C-corporation that operates the business; the C-corp establishes a new 401(k) plan; the buyer rolls existing retirement assets into the new 401(k); the new 401(k) buys stock in the C-corp; the C-corp uses the cash from the stock sale as equity for the business. No taxes are due because the rollover is between qualified retirement accounts and the stock purchase is within the plan. IRS Code Section 4975 prohibits prohibited transactions, but ROBS structures are explicitly allowed under specific rules.

Compliance burden

ROBS requires annual compliance: Form 5500 filing for the 401(k), annual valuation of the C-corp stock, plan administration, and treatment of subsequent employees (the 401(k) must offer participation to all eligible employees, which means the buyer’s retirement plan becomes available to staff). The annual compliance cost runs $1,500 to $3,500 with a specialty ROBS provider. The audit risk is real: the IRS has challenged ROBS structures in the past, though most properly structured ROBS plans survive review.

Part B: Financial health metrics for franchise units

Financial health for a franchise unit is measured against the same metrics buyers and sellers use for any small business, plus a layer of franchise-specific metrics that come from the FDD and the franchisor relationship.

Metric 1: FDD Item 19 vs actual P&L

The system average or median in Item 19 is the benchmark. The actual unit’s trailing 12 to 36 months P&L is the reality. Compare the two. If the unit is performing at or above system average, that supports the price. If significantly below, the buyer needs to understand why: location issue, operator issue, system-wide issue, or temporary issue.

Metric 2: Royalty payments vs reported revenue

Most franchise agreements specify royalties as a percentage of gross revenue. The royalty payment history (verified by the franchisor) should reconcile to reported revenue. Discrepancies indicate either revenue underreporting or royalty underpayment. Both are problems for the buyer.

Metric 3: Food and COGS variance vs system average

For QSR and food franchises, the franchisor publishes target food cost as a percentage of revenue. The unit’s actual food cost should be at or below the target. If the unit is significantly above, it indicates waste, theft, or pricing issues. Below the target may indicate creative accounting; verify with vendor invoices.

Metric 4: Labor variance vs system average

Labor as a percentage of revenue. Should track the system average. If significantly higher, the unit is over-staffed or the revenue is lower than expected. If significantly lower, the unit may be under-staffed in a way that affects service and customer retention.

Metric 5: Comparable royalty payments across the territory

If the franchisor has multiple units in the same metro area or trade region, comparing royalty payments shows the target unit’s relative performance. Some franchisors will share this anonymously with qualified buyers. Strong relative performance supports the price; weak relative performance suggests a discount.

Metric 6: Lease leverage

Lease payment as a percentage of revenue. Should be in the franchisor’s target range (typically 6 to 12 percent for QSR, 4 to 8 percent for service businesses). High lease leverage indicates either over-payment on lease or under-performance on revenue. Buyers should also check remaining lease term and renewal options.

Metric 7: Unit-level EBITDA reality vs FDD claims

FDD Item 19 sometimes includes EBITDA representations. These are typically based on system averages or top-performing units. The target unit’s actual EBITDA is the underwriting basis. Pay close attention to add-backs: legitimate owner compensation and one-time expenses, but skeptical of recurring items dressed as one-time.

Metric 8: Equipment age and capex backlog

Franchise units operate on equipment with finite useful lives. The buyer needs to know: age of major equipment, remaining useful life, deferred maintenance backlog, upcoming brand-required upgrades. A unit with $50K of capex coming in year 1 has different economics than a unit with no near-term capex.

Metric 9: Marketing fund contributions

Most franchises require monthly marketing fund contributions in addition to royalties (typically 2 to 4 percent of revenue). The unit must be current on these. The franchisor estoppel confirms.

Metric 10: Trailing same-store sales growth

Year-over-year same-store sales is the cleanest indicator of unit health. Growth of 3 to 10 percent typically indicates a healthy unit. Flat sales may indicate maturity. Declining sales indicate problems that need diagnosis before purchase.

Metric 11: Customer count and average ticket

Revenue equals customer count times average ticket. Breaking revenue into the two components reveals more than the total. A unit with declining customer count but increasing ticket (because of price increases) is masking a customer attrition problem.

Metric 12: Brand standards compliance

Internal franchisor inspections rate units on brand standards. A unit failing inspections is at risk for required upgrades, suspension of new product launches, or in extreme cases, default. Buyers should ask the franchisor for the inspection history.

Why system averages are not enough

FDD Item 19 typically reports system averages or median performers. These are useful for benchmarking but say nothing about the specific target unit. A unit in the top quartile of a system can sustainably grow; a unit in the bottom quartile of the same system may be structurally impaired. The buyer must underwrite the actual unit’s history, not the system. Sellers preparing for sale should know where the unit ranks within the system and how to position that ranking honestly.

Royalty payment history as truth serum

Royalties are paid as a percentage of revenue. If a franchise unit reports $750K in revenue and the contractual royalty is 6 percent, royalties paid should be $45K. If royalties paid were $42K, the math is close (small discrepancy). If royalties paid were $35K, the seller reported more revenue than the royalty payments support. The royalty payment history (available from the franchisor) is the most reliable verification of actual revenue.

The FDD Item 19 vs reality gap analysis

The single most important diligence step on a franchise acquisition is the FDD Item 19 vs reality gap analysis. Buyers who skip this step often discover after closing that the target unit performs significantly differently from what they assumed.

How to run the gap analysis:

Step 1: Read Item 19 carefully

Note: sample size, time period, geographic breakdown, tenure breakdown, what is reported (revenue, cost percentages, EBITDA), and what is excluded.

Step 2: Get the target unit’s trailing 24-36 months P&L

Monthly P&L. Include revenue, COGS, labor, rent, royalties, marketing fund, other operating costs, and net to seller. Reconcile to bank deposits and tax returns.

Step 3: Compare line by line

Revenue: unit revenue vs Item 19 system average for similar tenure and geography.

COGS: unit COGS as percentage of revenue vs Item 19 target.

Labor: unit labor as percentage of revenue vs Item 19 target.

Rent: unit rent as percentage of revenue vs system average.

Royalty: confirmed paid vs contractual rate times revenue.

EBITDA: unit EBITDA vs Item 19 average (if reported).

Step 4: Identify the gaps

Where is the unit better than system average?

Where is the unit worse than system average?

What explains each gap? (Location, operator, product mix, market, season, one-time events)

Step 5: Stress test the assumptions

If the buyer plans to operate the unit, what assumptions are baked into the projection? Will the buyer maintain the seller’s performance? Improve it? Worsen it? Each assumption should be tested.

If the unit is above average, why? Is it sustainable? Will the buyer’s operation match? If the seller is the operator and is leaving, much of the over-performance may walk out the door.

If the unit is below average, why? Is there a path to system average? What investment is required? How long?

Step 6: Adjust the price

The price should reflect the gap analysis. A unit at system average might trade at the system multiple. A unit at 1.3x system average might trade at a premium. A unit at 0.7x system average should trade at a discount or be re-priced before LOI.

Common gap patterns:

Pattern 1: Above-average revenue but below-average EBITDA

Typically indicates poor cost management or inflated COGS. Operator-correctable in many cases. Reasonable to underwrite to system average margin under new ownership.

Pattern 2: Below-average revenue but average margin

Typically indicates a location or market problem rather than operator. Harder to correct. Should be priced at a discount.

Pattern 3: Top quartile revenue but seller is leaving

Risk of regression to mean under new ownership. Should be priced with assumption that revenue will decline 10 to 20 percent in year 1 before recovering.

Pattern 4: Steady mid-range across all metrics

Lowest-risk acquisition. Buyer can underwrite confidently. Price at the system multiple.

Real example: Crumbl Cookies resale

A Crumbl unit reports $1.2M trailing 12-month revenue. Item 19 for the system (recent FDD) shows system average revenue of $1.4M for units open more than 24 months. The target unit is at 0.86x system average. The buyer needs to understand why: trade area issue (lower density), competitive pressure (other dessert concepts opened), operator issue (under-promotion, inconsistent hours), or temporary issue (seasonal dip).

If the answer is operator issue, a new operator can plausibly bring revenue to system average over 12 to 18 months. Worth a modest discount but not a heavy one.

If the answer is trade area issue, no amount of operator effort will bring revenue to system average. Should be priced as a permanently below-average unit.

What Item 19 actually reports

Item 19 is the franchisor’s financial performance representation. The FTC requires that if a franchisor makes any earnings claims, they appear in Item 19 with substantiation. Many franchisors structure Item 19 conservatively to avoid liability: system-wide average revenue, median performer revenue, top-quartile performance, or specific metrics like average customer ticket. Some franchisors report cost structures (food cost percentage, labor cost percentage) but not EBITDA. Some report nothing, which is informative in itself.

How sophisticated buyers read Item 19

Sophisticated buyers read Item 19 looking for: distribution of performance (range from worst to best), sample size (how many units are represented), tenure breakdown (mature vs new), geographic breakdown (urban vs rural, region vs region), and what is excluded (which units are not in the sample and why). The most useful Item 19s break out by tenure and geography. The least useful give only system-wide averages with no distribution context.

Sellers: pre-qualifying your unit for sale

Sellers can pre-qualify their unit for sale by running the same financial health analysis buyers will run, before going to market. The result: identify issues, fix them where possible, and price them into the deal where not.

Pre-qualification checklist:

1. Run the FDD Item 19 vs reality analysis on your own unit

Where do you sit relative to system average? If above, document why and how it is sustainable. If below, identify the gap drivers and either fix them or position the discount honestly.

2. Reconcile royalties to reported revenue

Pull 36 months of royalty payment records from the franchisor. Match to monthly revenue reports. Discrepancies need explanation; if you have been underreporting revenue (intentionally or not), the buyer will discover it. Better to clean up now or accept the risk discount in pricing.

3. Clean up the books

Personal expenses run through the business should be identified and presented as add-backs in the deal. Family salaries above market should be identified. Owner perks should be documented. The cleaner the books, the smoother the diligence.

4. Confirm royalty and marketing fund current status

Order a franchisor estoppel. Confirm: royalties current, marketing fund current, no outstanding disputes, unit in good standing. Resolve any outstanding items before going to market.

5. Address brand standards compliance

If you are behind on a remodel or non-compliant on equipment, decide: complete the work before sale (improves price), or price the deferred work into the discount. Both can be acceptable; the wrong answer is going to market without disclosing.

6. Confirm lease standing

Order a landlord estoppel. Confirm: rent current, lease term remaining, assignment provisions, landlord consent process. A short remaining lease term with no renewal option significantly affects price; consider negotiating an extension before going to market.

7. Document the operating systems

What systems run the unit? Who knows them? If you are the operator and leaving, what gets documented vs lost? A unit with documented systems trades at a premium to a unit where the owner’s head holds the playbook.

8. Identify capex backlog

What equipment is approaching replacement? What deferred maintenance exists? What brand-required upgrades are coming? Document and either complete or disclose with pricing impact.

9. Verify SBA Franchise Directory status

Confirm your brand is on the directory. If not, communicate this to the buyer early; financing will be more difficult.

10. Prepare the data room

Before going to market, assemble: 36 months P&L (monthly), tax returns (3 years), royalty payment history, franchisor estoppel, landlord estoppel, equipment list with age and condition, lease document, FA document, employee roster with tenure and compensation, customer count data if available.

Sellers who complete this pre-qualification typically see: faster diligence (buyer has fewer surprises), stronger offers (buyer underwrites confidently), and higher close rate (fewer deals die at diligence).

Real example: Crumbl Cookies resale acquisition with SBA 7(a)

A Crumbl Cookies operator wants to sell a 3-year-old unit doing $1.2M trailing 12-month revenue. The pre-qualification reveals:

Revenue is below system average ($1.4M). Operator agrees and explains: small trade area, two newer Crumbls opened nearby. This is a price discount, not a fix.

Royalties are current. Estoppel confirms.

Books include $35K of personal expenses run through the business. These become add-backs. Total SDE adjusts upward.

Lease has 5 years remaining with one 5-year renewal option. Healthy for buyer financing.

Equipment is 3 years old, in good condition. No near-term capex.

Brand on SBA Franchise Directory. SBA 7(a) available.

Resulting price: $475K (3.5x adjusted SDE of $135K). Buyer brings $95K down (20 percent SBA) and finances $380K SBA 7(a) over 10 years. The seller carries a $45K seller note (subordinated) to bridge the buyer’s working capital needs. Closing 4 months after LOI.

The pre-qualification work let the seller go to market confidently at the right price, with a buyer-ready data room, and close without diligence surprises.

Why pre-qualification matters

Sellers who pre-qualify their unit before going to market identify issues that would surface in buyer diligence and either fix them or price them into the deal upfront. This avoids surprises that kill deals at the diligence stage, which is the most expensive place for a deal to fail (advisor fees committed, lender fees committed, legal fees committed, time spent). A pre-qualified unit closes faster and at a better price than a unit that surfaces problems mid-process.

The clean-up window

Most cleanup work takes 6 to 12 months. Books cleanup, royalty reconciliation, brand standard remediation, and lease renewal negotiations all run on franchisor and landlord timing. Sellers planning to sell within 12 months should start cleanup now. Sellers planning further out have the luxury of doing cleanup gradually, which is less stressful and produces better results.

Putting it together: a buyer’s diligence and financing plan

A buyer’s full plan from initial interest to closing combines the financing path with the diligence sequence. Doing both well is the difference between a smooth close and a stressful one.

Phase 1: Pre-LOI (4 to 6 weeks)

Read the FDD top to bottom. Item 19 is the focus, but Item 20 (transfer activity), Item 7 (initial investment), and Item 8 (sources of products and services) all matter.

Verify SBA Franchise Directory status.

Pre-qualify with at least 2 SBA lenders. Submit personal financial statements, get pre-qualification letters. Understand the lender’s appetite for the brand.

Order anonymous brand-level diligence: franchisee surveys if available, public reviews, news coverage, current franchisor leadership history.

Establish the financing structure: SBA 7(a) only, or SBA + ROBS, or SBA + seller note, or other.

Phase 2: LOI to Closing (90 to 150 days)

Submit LOI to seller. Negotiate price, terms, contingencies. LOI should include financing contingency, franchisor approval contingency, diligence contingency, lease assignment contingency.

Engage franchisor: submit franchisee application. Begin financial pre-qualification with franchisor.

Engage SBA lender: submit loan application. Begin underwriting.

Order full diligence: 36 months P&L, tax returns, royalty payment history, franchisor estoppel, landlord estoppel, equipment list, employee roster, customer data.

Run Item 19 vs reality gap analysis. Confirm assumptions or re-price.

Engage attorney: review FA, asset purchase agreement, lease assignment, SBA closing documents.

Complete franchisor training (if required pre-close in your brand).

Coordinate parallel timelines: SBA approval and franchisor approval should converge in the same week. Lease assignment runs in parallel.

Close: pay purchase price, pay transfer fee, sign new FA, sign lease assignment, sign SBA loan documents, take possession of unit.

Phase 3: Post-close (90 days)

Operate the unit. Confirm cash flow matches diligence expectations.

Activate royalty waiver (if granted). Confirm in writing with franchisor.

Implement any operational changes. Avoid disruption in the first 30 to 60 days; staff and customers are watching for stability.

Build relationships: with franchisor field representative, with key staff, with regular customers, with vendors.

What typically goes wrong:

1. Buyer assumes Item 19 represents the target unit. Discovers in diligence that the target underperforms. Renegotiates or walks.

2. SBA loan delayed beyond franchisor approval window. Franchisor requires resubmission of paperwork; buyer pays additional costs.

3. Lease assignment denied by landlord. Buyer has no contingency plan. Deal dies.

4. Franchisor refuses to consent to SBA lien. Lender requires unsecured loan, which has worse terms. Buyer needs to re-price or walk.

5. Outstanding royalty dispute surfaces in estoppel. Seller must resolve before close. Adds time.

6. Buyer fails franchisor training. Cannot close. Loses deposit.

Each of these is preventable with thorough pre-LOI work and disciplined Phase 2 execution.

For more on the franchisor approval process, see franchise resale complete guide. For SBA mechanics, see SBA loan to buy a business.

Phase 1 timing

Pre-LOI work (4 to 6 weeks): FDD review, Item 19 read, brand-level diligence, financing pre-qualification. This work happens before LOI because it affects whether the deal is worth pursuing. Buyers who skip pre-LOI work waste time and money on deals that should have been disqualified earlier.

Phase 2 timing

LOI to closing (90 to 150 days): franchisor approval, SBA loan processing, full financial diligence, lease assignment, legal documentation, closing. The processes run in parallel; the slowest one sets the timeline. Most often the franchisor approval is the slowest, especially for brands with multi-month training requirements.

Frequently Asked Questions

What is the best way to finance a franchise acquisition?

SBA 7(a) is the most common financing tool for franchise acquisitions. It offers 10 to 25 percent down, 10-year amortization, and up to $5M in loan size. The brand must be on the SBA Franchise Directory. For deals with real estate, SBA 504 may be better. For buyers with $250K+ in retirement assets, ROBS combined with SBA can reduce out-of-pocket cash. Conventional bank loans work best for experienced multi-unit operators with strong balance sheets.

What is the SBA Franchise Directory?

The SBA Franchise Directory is the official SBA list of franchise brands pre-reviewed for SBA loan eligibility. Brands on the directory can be financed under SBA 7(a) and 504 without additional brand-level review. Brands not on the directory can still be financed but require a Franchise Findings Form review, which adds 30 to 60 days and additional documentation. Most established brands (Subway, McDonald’s, Dunkin, UPS Store) are on the directory.

How does ROBS financing work?

ROBS (Rollover for Business Startup) uses 401(k) or IRA assets to fund a business without triggering tax or early withdrawal penalty. Mechanics: buyer establishes new C-corp, the C-corp sponsors a new 401(k), the buyer rolls retirement assets into the new 401(k), the new 401(k) purchases C-corp stock, and the C-corp uses the cash to fund the business. Requires C-corp structure, annual Form 5500 filing, and employee 401(k) participation. Best for buyers with $250K+ in retirement assets.

What is FDD Item 19?

FDD Item 19 is the financial performance representation section of the Franchise Disclosure Document. It contains the franchisor’s earnings claims, typically including system-average revenue, median performer revenue, top-quartile performance, or specific cost metrics. The FTC requires that any earnings claims appear in Item 19 with substantiation. Sophisticated buyers read Item 19 alongside actual unit-level financials to identify gaps between system average and target unit performance.

How do I verify the actual revenue of a franchise unit?

The most reliable verification is royalty payment history from the franchisor. Royalties are paid as a percentage of revenue. If the unit reports $750K revenue at a 6 percent royalty, royalty payments should be $45K. Reconcile the franchisor royalty payment history to the seller’s reported revenue and bank deposits. Discrepancies indicate underreporting or other issues that affect price.

Can I get seller financing on a franchise acquisition?

Seller financing is common in franchise resales (10 to 30 percent of price held back over 2 to 5 years) but rare on new franchise units. The seller note typically bridges the SBA loan amount and the actual purchase price. SBA requires seller notes to comply with specific subordination and standby rules. Most franchise resales include some seller financing to reduce buyer cash requirements and demonstrate seller confidence in the business.

What is a healthy royalty current ratio for a franchise unit?

A healthy franchise unit pays royalties monthly without delay and is current with the franchisor on all fees including marketing fund contributions. The franchisor estoppel will confirm current status. Any past-due royalties or disputed amounts are red flags that need resolution before closing. Sellers should clear all royalty issues 6 to 12 months before going to market.

How do I check if a franchise is on the SBA Franchise Directory?

Visit the SBA website and search the SBA Franchise Directory by brand name. The directory lists certified brands with their SBA franchise identifier code. Most established franchise brands are on the directory. Newer or niche brands may not be; if your target is not listed, ask the franchisor if they are pursuing certification, and confirm with your SBA lender whether they will underwrite off-directory deals.

How long does franchise financing take to close?

SBA 7(a) financing for a franchise acquisition typically takes 60 to 120 days from application to close. The timeline runs in parallel with franchisor approval (also 60 to 120 days). The slowest process sets the deal timeline. Buyers should plan for 90 to 150 days total from LOI to closing. ROBS structures add 30 to 60 days for entity setup if not started earlier. Conventional bank loans are typically faster, 30 to 60 days.

What do sellers need to prepare before going to market?

Sellers should assemble: 36 months of monthly P&L, 3 years of tax returns, royalty payment history, franchisor estoppel confirming current standing, landlord estoppel confirming lease standing, equipment list with age and condition, current lease document, franchise agreement, employee roster with tenure, and customer data if available. The pre-qualification work takes 6 to 12 months and produces faster diligence, stronger offers, and higher close rates.