SBA 7(a) Franchise Acquisition Loans

New to franchise financing? Start with our complete SBA Franchise Financing Guide for a full overview of programs, eligibility, fees, and multi-unit structures.

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 smoothly
• 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 against standard SBA loan requirements independently:

• Business financials (historical performance, which must show at least 1.25:1 debt service coverage for a first-time buyer)
• 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. Under SOP 50 10 8.1, total debt (including any seller note not on full standby) can't exceed the business valuation, and if the price is above the valuation, the difference must be made up with equity.^[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%, the SBA floor)
• Terms: 10 years, at an assumed 9.5% rate
• Monthly payment: about $3,200 (about $38,400 a year)

Coverage: $85K of SDE minus a $35K salary for Priya leaves $50K of cash flow against $38,400 of annual debt service, about 1.30x on the seller's historical results, above the 1.25:1 floor. If she needed a $45K salary, coverage would fall to about 1.04x and the deal would fail as structured; the fix would be more equity or a lower price, not projections.

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. For more common questions, see our franchise SBA loan FAQ.