SBA 7(a) Franchise Acquisition Loans

Why Should You Consider Buying an Existing Franchise?

Acquiring an existing franchise unit with an SBA 7(a) loan offers several advantages over starting new:^[1]

• Proven financials: Real revenue and profit history
• Established customer base: Day-one revenue
• Trained staff: Operations continue seamlessly
• Existing infrastructure: Equipment, systems, location
• Easier financing: Lenders prefer actual data over projections

How Does the Dual Approval Process Work?

Franchise acquisitions require two separate approvals:^[2]

1. Franchisor Approval

The franchisor must approve the transfer. They evaluate:

• Your financial capacity (net worth, liquidity)
• Relevant experience or background
• Willingness to follow brand standards
• Credit history and character
• Completion of their training program

2. SBA Lender Approval

The lender evaluates the deal independently:

• Business financials (historical performance)
• Purchase price reasonableness (valuation)
• Your creditworthiness and experience
• Cash flow and debt service coverage
• Collateral and equity injection

What Can an SBA 7(a) Acquisition Loan Cover?

An SBA 7(a) acquisition loan typically covers:

• Purchase price: Including goodwill
• Transfer fee: Required by most franchisors
• Working capital: 2-3 months operating expenses
• Training costs: If required by franchisor
• Equipment upgrades: If needed for compliance
• Remodel costs: If PIP (Property Improvement Plan) required

How Are Existing Franchises Valued for SBA Loans?

Existing franchises are typically valued based on Seller's Discretionary Earnings (SDE):

SDE Calculation

SDE = Net Income + Owner Salary + Owner Benefits + Non-Cash Expenses + One-Time Expenses

Typical Multiples

Lenders will verify that the purchase price is reasonable relative to the financials. Overpriced deals may require higher equity or be declined.^[3]

What Transfer Fees and Costs Should You Budget For?

Budget for these additional acquisition costs:

• Transfer fee: $5,000 - $50,000+ depending on brand
• Training costs: $5,000 - $25,000 if required
• Legal fees: $3,000 - $10,000 for transaction
• Due diligence: Accountant review, inspections
• Lender fees: SBA guarantee fee, closing costs

What Should Your Due Diligence Cover?

Financial Review

• 3 years tax returns
• Monthly P&L statements (2+ years)
• Point-of-sale data and sales trends
• Accounts payable and receivable
• Existing debt and liens

Franchise Agreement Review

• Remaining term (or new agreement?)
• Territory rights and protection
• Current royalty and marketing fees
• Transfer provisions and restrictions
• Required upgrades or remodels (PIP)

Operational Review

• Equipment condition and age
• Lease terms and assignment
• Employee roster and wages
• Franchisor compliance history
• Customer reviews and reputation

What Franchise Agreement Issues Should You Watch For?

Assignment vs. New Agreement

When acquiring a franchise, the franchisor may either:

• Assign existing agreement: You assume the remaining term
• Issue new agreement: Fresh term (typically 10-20 years)

A new agreement is usually better—you get a full term with current (though possibly updated) terms.

Watch for Hidden Requirements

• Required remodels or equipment upgrades
• Technology system changes
• Increased royalty rates in new agreements
• Territory modifications

Example: Buying a Sandwich Shop

Priya wants to buy an existing sandwich franchise with $400K revenue and $85K SDE.

Deal structure:

• Purchase price: $230,000 (2.7x SDE)
• Transfer fee: $15,000
• Working capital: $30,000
• Total project: $275,000

Financing:

• SBA 7(a) loan: $247,500 (90%)
• Priya's equity: $27,500 (10%)
• Terms: 10 years at Prime + 2.75%
• Monthly payment: ~$2,900

The historical financials made qualification straightforward, and she got franchisor approval within 3 weeks.^[4]

How Long Does a Franchise Acquisition Take?

Note: Franchisor approval and SBA underwriting can often run in parallel.