Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchise Resales Are Beating New Unit Openings
Transcript
- Lucas: So here's a stat that jumped out at me from the International Franchise Association's Q1 2026 report: franchise resale transactions were up 22 percent year-over-year. That's not new franchise openings — that's people buying existing franchise locations from other franchisees. And it's now the fastest-growing segment of franchise ownership. Luna: That's interesting because the narrative you usually hear is all about ground-up builds — the ribbon cutting, the grand opening. Resales feel almost like a hidden market. Lucas: Exactly. And I think a lot of potential franchisees overlook them because they assume buying an existing business carries more risk — you're inheriting someone else's problems. But the data tells a different story. The IFA's survey of franchisee failure rates shows that resales have a significantly lower failure rate in the first three years compared to new builds. Something like 8 percent versus 15 percent. Luna: So you're actually less likely to fail if you buy an existing location. That seems counterintuitive. What's driving that? Lucas: A few things. First, you're buying a location with established cash flow — or at least a track record. You can look at the P&L for the last three years and see exactly what you're getting into. With a new build, you're projecting. And projections are often optimistic. Second, the brand recognition is already there. You don't have to spend the first year just getting people in the door. Luna: Right. And you skip the build-out period — no construction delays, no permit headaches, no six months of paying rent on an empty shell. Lucas: Exactly. That time to revenue is huge. Let me give you a concrete example. I talked to a franchise consultant who handled a Dunkin' resale in a suburb of Boston — about 35 miles west of the city. The purchase price was $350,000, plus an inventory and equipment adjustment. The unit was generating about $180,000 in EBITDA. Compare that to a new Dunkin' build in the same area — land costs, construction, equipment — you're looking at $600,000 to $700,000 all-in, and the first year EBITDA is maybe $120,000 because it takes time to build the customer base. Luna: So the resale buyer is paying roughly half the upfront cost and getting 50 percent more EBITDA in year one. That's a much better return on investment. Lucas: It is, on paper. But there are catches. Let's talk about the biggest one: the condition of the equipment and the lease. That Dunkin' location — the equipment was seven years old. The espresso machine was due for replacement, the HVAC was on its last legs. The seller had been deferring maintenance. So the buyer had to factor in about $40,000 in capital expenditures within the first 18 months. Luna: Which eats into that EBITDA advantage. Suddenly your year-one cash flow is more like $140,000 after CapEx. Lucas: Right. And then there's the lease. The original lease had five years remaining with a five-year renewal option, but the rent was below market — about $4,500 a month when comparable spaces were going for $6,000. The landlord, of course, knows that. So when the renewal comes up, you're looking at a 33 percent rent increase. That changes the whole underwriting. Luna: So due diligence on a resale isn't just about the financials. You need a thorough equipment inspection, a lease review with an attorney who knows commercial real estate, and maybe even a conversation with the landlord to gauge their willingness to negotiate. Lucas: Absolutely. And the smartest resale buyers I've seen also do a deep dive on the brand's own attitude toward resales. Some franchisors are very supportive — they even maintain internal databases of franchisees looking to sell. Others are more hands-off, and a few actually discourage them because they want all locations to be new-build, same-look. Luna: Which brands are on the supportive side? I've heard that McDonald's and Subway have pretty active resale markets. Lucas: Yeah, McDonald's is interesting because they've been buying back a lot of locations from franchisees lately — that was our episode five topic — but they also facilitate resales between franchisees. Subway, definitely. And 7-Eleven has a huge resale network because many of their locations are franchised and change hands regularly. The key thing is that the franchisor has to approve the buyer, so they want someone who meets their standards. Luna: So the approval process can be a barrier too. If you're buying a resale, you still have to go through the franchisor's vetting process — financial qualifications, background check, training program. Lucas: Exactly. And sometimes the training requirement is the same as for a new franchisee, which can be frustrating if you're already an experienced operator. But the IFA data shows that the average resale buyer actually has more business experience than the average new franchisee — often they've owned a business before, just not necessarily a franchise. Luna: That makes sense. Buying an existing business requires a different skill set — you need to be comfortable assessing financial statements, negotiating a purchase agreement, and managing a transition. Lucas: And you need to be ready for the psychological side. You're taking over a business that has existing employees, existing customers, and a reputation — good or bad. The seller might be retiring, or they might be selling because the location is losing money. If it's the latter, you need to understand why and whether you can turn it around. Luna: Let's talk about how you actually find these resale opportunities. Are they listed on broker sites? Do you go directly to the franchisor? Lucas: Both. There are franchise-specific business brokers — some of the big names are Franchise Brokers Association and Transworld Business Advisors. They list resale opportunities alongside new franchise opportunities. But a lot of resales never get publicly listed. They happen through the franchisor's internal network or through word of mouth among franchisees. So if you're serious about buying a resale, you want to let the franchisor know you're interested. Get on their list. Luna: And the pricing — how do you value a franchise resale? It's not as simple as a multiple of EBITDA because the brand agreement has a limited term, right? Lucas: Right. The franchise agreement typically runs 10 to 20 years, and the value of the resale depends heavily on how much time is left. If there are only five years left, the buyer faces the risk that the franchisor won't renew, or that renewal terms will be worse. So the multiple compresses. A typical franchise resale might trade at two to three times EBITDA, but if the agreement is short, you could see multiples below two. Luna: That's a key due diligence item — you need to understand the renewal history of the brand. If the franchisor has a track record of not renewing underperforming units, that's a risk. Lucas: Absolutely. And there's another twist: some franchisors charge a transfer fee when a resale happens. It can be anywhere from $10,000 to $50,000 or more, and it's usually paid by the buyer. That's a real cost that needs to be factored into the purchase price. Luna: So the all-in cost of a resale isn't just the purchase price. You've got the transfer fee, legal fees, possibly broker commissions — which can be 5 to 10 percent of the sale price — and then the CapEx needs. Lucas: Yeah, broker commissions are a big one. On a $350,000 deal, a 10 percent commission is $35,000. And sometimes the seller pays that, sometimes it's split. But it all factors into the economics. The good news is that financing a resale is often easier than financing a new build. Banks see an established cash flow, so they're more willing to lend. SBA loans are common, and some sellers offer seller financing — maybe 20 percent of the purchase price as a note. Luna: Seller financing can be a win-win. The seller gets a higher price because they're offering terms, and the buyer gets a lower upfront cash requirement. Lucas: And it aligns incentives. If the seller is willing to take a note, they have a vested interest in making sure the business continues to perform. They might even stay on for a transition period — six months of training and handover. Luna: That transition period is something I think a lot of first-time resale buyers underestimate. You're not just buying a building and equipment. You're buying a relationship with employees and customers. If the seller is a beloved figure in the community, and you come in and change things too fast, you could lose that goodwill. Lucas: Great point. The best resale buyers I've seen do a gradual transition. They keep the same staff, the same supplier relationships, even the same menu items for the first year. Then they slowly introduce changes. And they make sure the seller introduces them to every regular customer personally. Luna: So what's the one piece of advice you'd give someone considering a franchise resale right now, in mid-2026? Lucas: Don't assume a resale is automatically cheaper or safer than a new build. Do the full workup: get three years of tax returns, a equipment inspection, a lease audit, and a conversation with the franchisor's development team. And compare the projected return on investment to a new build in the same area. For some people, the resale path is clearly better. For others, the control and predictability of a new build wins out. But the data from this year's IFA report is clear: resales are becoming a bigger part of the franchise landscape, and they deserve serious consideration. Luna: I think that's a really practical takeaway. Next episode, let's dig into the franchisor's perspective — how brands are restructuring their royalty structures to attract more resale buyers. Lucas: That's a great angle. Some brands are even offering reduced royalties for the first year on resales. It's a fast-changing space. We'll cover it. Luna: Looking forward to it.