Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Resale Acquisitions to Build Cheaper
Transcript
- Lucas: Something like 20 percent of franchise openings last year weren't new builds — they were resales. Existing units changing hands. And the average resold franchise goes for roughly 30 to 40 percent less than the cost of building from scratch. Luna: So you're buying something already operational, with a customer base, for less money. That sounds like a no-brainer. Why isn't everyone doing it? Lucas: Because 'existing' also means 'inherited baggage.' You're buying someone else's problems — maybe outdated equipment, a lease that's underwater, or a reputation that's taken a hit. But if you do the homework, the economics can be compelling. Luna: Let's talk homework. What's the first thing you look at when you find a franchise resale listing? Lucas: The P&L — profit and loss — for at least the last three years. But not just the top line. You want to see trends in food cost, labor cost, and occupancy. If those are all creeping up, the seller might be a good manager who just got tired. Or they might have let the operation slide. Luna: Right, because you're buying their trajectory, not just their history. Lucas: Exactly. Next, you verify the lease. Many franchise resales fall apart because the landlord won't transfer the lease, or wants a higher rent. You need a lease that runs long enough to recoup your investment — ideally at least ten years with renewal options. Luna: And what about equipment? I've heard horror stories about dirty hood systems and failing freezers. Lucas: You bring in an independent inspector. Most franchise systems require the buyer to meet their equipment standards anyway, so factor in a capital expenditure budget of maybe $30,000 to $60,000 for renovations and upgrades. But if the seller has kept good maintenance records, you might avoid big surprises. Luna: Let's talk numbers. Can you give us a concrete example of a resale that worked well? Lucas: I spoke with a franchisee in Ohio who bought a struggling sandwich franchise for $180,000. Building a new unit of the same brand would have cost about $280,000 all-in. The store was doing $320,000 in annual revenue with a 5 percent profit margin — basically breaking even. Luna: So he bought a business that was barely alive. What did he change? Lucas: First, he kept the existing crew — two part-time managers and a handful of hourly workers. He spent $40,000 on a cosmetic refresh: new paint, updated signage, a modern point of sale system. Then he focused on labor scheduling efficiency and a local catering push. Within 18 months, revenue hit $520,000 and margin climbed to 12 percent. Luna: That's a 60 percent revenue lift. What was the biggest driver — catering? Lucas: Catering played a role, but the labor optimization was key. The previous owner was scheduling a full crew for slow hours. The new owner used the franchise's analytics tools to match staffing to historical traffic. That alone added about $18,000 to the bottom line annually. Luna: So the resale gave him a cheaper entry point and a system that already had some revenue to build on. But not every resale story ends that way. What are the biggest red flags? Lucas: One: the seller won't share three years of tax returns. That's a huge warning sign. Two: the franchise system itself is in decline — same-store sales dropping across the brand. Three: the lease has less than five years left with no renewal clause. And four: there's pending litigation — maybe a customer lawsuit or a dispute with the franchisor. Luna: How do you check for franchisor disputes? The FDD? Lucas: Yes, the Franchise Disclosure Document, Item 3 specifically. That lists any litigation involving the franchisor. But you also want to talk to at least three other franchisees in the system — not just the ones the franchisor recommends. Ask them about the resale process and how the franchisor handles transfers. Luna: And the financing — can you get an SBA loan for a resale? Lucas: Absolutely. SBA 7a loans are the standard for franchise acquisitions, both new and resale. In fact, resales can be easier to finance because there's existing cash flow to support debt service. Lenders like seeing a proven track record, even if that track record is mediocre — as long as you have a plan to improve it. Luna: That's a good point. A resale is already spitting off revenue, so the bank can underwrite against actual numbers rather than projections. Lucas: Right. And you can sometimes negotiate seller financing. Maybe the seller carries 20 percent of the price as a note, which reduces your cash upfront and gives the seller an incentive to help you succeed during the transition. Luna: What about multi-unit operators? Is buying a resale more attractive if you already have several units? Lucas: It can be. For an experienced operator, buying a resale is often faster than building new. You skip the construction timeline — typically 6 to 12 months — and you start generating cash flow from day one after the transfer. That's huge for scaling quickly. Luna: But you also want to make sure the territory makes sense in your existing footprint. You don't want to cannibalize your own sales. Lucas: Exactly. You need to analyze the trade area. Use the franchisor's territory mapping tools or third-party demographic data to see if the location complements your other units. And check for non-compete clauses in your existing franchise agreement that might restrict you from buying nearby. Luna: So there's a lot of moving parts. But the core idea — buying an existing franchise at a discount — is a legitimate way to build a bigger portfolio without taking on construction risk. Lucas: And without the uncertainty of a new location. You get a real address, real customers, real data. The question is whether you can fix what's broken and then grow from there. Luna: And that's the kind of detailed analysis we try to bring to every episode. It's why we dig into these strategies — they can actually move the needle for franchisees. Lucas: And honestly, the fact that we can do this without ads or sponsors — that's because a small group of listeners chips in each month at buy me a coffee dot com slash fexingo. It's a simple way to support the work, and it keeps these conversations independent. Luna: Yeah, no upsells, no sponsored segments — just the strategies we think actually matter. Lucas: So if you've gotten value from the show over the years, that's one way to give back. And we appreciate every single person who does. Luna: Definitely. So back to resales — what's the one piece of advice you'd give someone looking at their first resale acquisition? Lucas: Spend the money on due diligence. Hire a franchise attorney who's done resales before, a CPA to verify the financials, and an equipment inspector. That upfront cost — maybe $3,000 to $5,000 — can save you from buying a $200,000 headache. Luna: And maybe negotiate a contingent offer: 'I'll pay your asking price, but only if these three conditions are met.' Lucas: Exactly. Earnest money, inspection periods, lease assignment contingencies — all standard in real estate, but a lot of franchise buyers forget they exist. So whether you're buying new or buying used, the fundamentals are the same: know your numbers, know your territory, know your franchisor. Luna: And maybe know which franchisees are selling. Lucas: Exactly. That's where the opportunity often hides.