Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Buying Out Their Neighbors
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- Lucas: There's a quiet shift happening in franchise growth, and it's not about building new units. More and more franchisees are buying out their neighbors. Luna: You mean acquiring existing locations from other franchisees, rather than opening from scratch? Lucas: Exactly. In-system M&A — merger and acquisition activity within the same brand. And the numbers are starting to tell a story. According to data from FranData, in 2025, nearly 22 percent of all franchise unit transfers were sales from one franchisee to another. That's up from about 15 percent five years ago. Luna: So a growing chunk of the market is basically just reshuffling ownership. Lucas: Right. And the reasons are pretty compelling. Let's use a concrete example. I talked to a multi-unit Jimmy John's operator in the Midwest — he owns about a dozen locations. Last year, instead of building two new stores, he bought three existing ones from a retiring franchisee in the same market. Luna: What did that cost him compared to building new? Lucas: He said the acquisition price for each store was roughly 60 percent of what it would have cost to build and equip a new unit. So he saved about forty cents on every dollar of capital deployed. And those stores were already cash-flow positive. He didn't have to wait 12 to 18 months for a new location to ramp up. Luna: That's a huge advantage. But there have to be trade-offs. Lucas: There are. The biggest one is you inherit the previous owner's problems. Maybe the equipment is older and needs replacement sooner. The staff might be set in their ways. And the financial performance could be worse than advertised. You're buying a used car, not a new one. Luna: So due diligence is arguably more important than with a new build. Lucas: Absolutely. With a new unit, you control the site selection, the build-out, the hiring. With an acquisition, you're taking a snapshot of someone else's decisions. The smart operators spend a lot of time auditing the financials and the operations before they commit. Luna: And how are franchisors reacting to this trend? Some brands might prefer new builds to expand their footprint. Lucas: That's a key point. Historically, many franchisors discouraged in-system sales because they wanted net unit growth. But that's changing. More brands now have internal marketplaces or matchmaking platforms. They realize that a strong multi-unit operator taking over a struggling location is better than that location closing and damaging the brand. Luna: Right, it's about stabilizing the system. Lucas: Exactly. And from the buyer's perspective, it's often a faster path to scale. If you're already running eight units, adding two through acquisition might take six months, whereas building two new ones could take two years. Time is money. Luna: What about financing? Does it differ from a new build? Lucas: It can. SBA loans still work for acquisitions, but the underwriting is different. The lender looks at the existing cash flow of the business, not projected cash flow. If the store is profitable, you might get better terms. But you also need to have a strong personal balance sheet. Some franchisees use a mix of SBA and seller financing. Luna: Seller financing — that's where the previous owner essentially acts as the bank for part of the purchase price. Lucas: Yes. It's common in franchise resales because the seller has an incentive to ensure the transition goes smoothly. They might hold a note for 20 or 30 percent of the price, paid out over five years. That can be a win-win. Luna: So if these conversations have moved your work forward in some small way, that's exactly what listener support helps us keep doing. We're able to stay independent and ad-free because of folks who chip in at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. And we appreciate it. Now back to the buyout trend: one thing I find interesting is the geographic pattern. These acquisitions are happening most often in mature markets where prime real estate is already taken. Luna: So it's not just about cost savings, it's about access. You can't build a new store on a corner that already has a franchise location. Lucas: Exactly. In dense suburban areas, the best intersections are already occupied. If you want to grow in that market, you have to buy an existing store. That's driving a lot of these deals. Luna: Are there any risks specific to taking over a location that's underperforming? Lucas: Yes, and that's a common scenario. A lot of franchisees sell because they're struggling. The buyer has to figure out whether the underperformance is fixable or structural. If it's a bad location — maybe the demographics shifted — no amount of management change will fix it. But if it's operational issues, a good operator can turn it around. Luna: So the buyer needs to diagnose the root cause before signing. Lucas: Right. I've seen franchisees walk away from deals after spending weeks auditing the store. And that's a good outcome. Better to lose due diligence costs than to buy a money pit. Luna: What about the seller's perspective? Why are franchisees selling to other franchisees instead of to the franchisor or to an outsider? Lucas: Often it's about speed and certainty. Selling to another franchisee in the same system means the buyer already understands the brand, the operations, the supply chain. There's less risk of the deal falling through. And the franchisor is usually more comfortable approving the transfer. Luna: Plus, the seller might get a better price if the buyer sees synergies. Lucas: Exactly. A multi-unit operator can often justify paying a premium because they can centralize management, combine purchasing power, and spread fixed costs. So the acquisition is worth more to them than it would be to a first-time buyer. Luna: Are there any franchise sectors where this trend is especially pronounced? Lucas: Quick-service restaurants are leading, for sure. Also commercial cleaning and home services. Basically, any sector with a lot of mature, single-unit owners approaching retirement age. We're at a demographic inflection point where a lot of baby boomer franchisees are looking to exit. Luna: So this wave could accelerate over the next five to ten years. Lucas: I think it will. And for younger, ambitious franchisees, buying out a retiring owner is one of the fastest ways to scale. You skip the learning curve of a new build and you get immediate cash flow. Luna: But it's not passive. You still have to run the business well. Lucas: No question. If you acquire a store and then don't improve it, you're just stuck with someone else's mediocre results. The real value creation comes from applying your operational playbook. Luna: One thing I'm curious about: how do you value a franchise resale? Is it based on a multiple of earnings, or something else? Lucas: Typically it's a multiple of seller's discretionary earnings, or SDE. For QSR, multiples range from about 2 to 4 times SDE, depending on the brand, the location, and the condition of the assets. A well-maintained store in a strong market might fetch 3.5 times. A tired store in a declining area might go for 1.5. Luna: So there's a wide range. It really depends on the specific unit. Lucas: Right. And that's why you need a good broker who specializes in franchise resales. They can help you benchmark against comparable sales in the system. Luna: Final thought: if a franchisee is considering this path, what's the one piece of advice you'd give? Lucas: Talk to other franchisees who have done it. The due diligence is different from a new build. You need to look at sales trends, equipment age, lease terms, staff turnover. And you need to be honest with yourself about whether you can actually improve the unit. If you can't, it's probably not a good deal. Luna: Good advice. And it ties back to the bigger picture: growth isn't always about building something new. Sometimes the smartest move is buying something that already exists and making it better. Lucas: Exactly. That's the quiet shift we're seeing in franchise land. And it's likely to become a lot louder in the coming years.