Financing Franchise Growth and Buyouts

As your franchise business succeeds, you might be looking to expand by opening new units or acquire existing franchises. Expansion & acquisition loans are designed to fuel that kind of growth. From Liberty Franchise Lending’s perspective, these loans enable franchisees to scale up – whether it’s adding a second location or buying out a franchise owner who’s retiring. Such loans provide the significant capital needed for expansion, with the expectation that the established or new units’ cash flow will support repayment. In this section, we’ll cover who these loans are for, typical sizes, interest rates, terms, key approval factors, pros/cons, and answer common questions on financing franchise growth.

Expansion loans and acquisition loans cater to slightly different scenarios but both involve growing your franchise ownership:

• Expansion Loans: If you already run a franchise and want to open additional locations or territories, you’ll likely seek an expansion loan. These are common for successful single-unit franchisees who become multi-unit operators. Also, if you need to expand your current location (adding square footage or significant remodeling to increase capacity), this type of financing can apply.
• Acquisition Loans: If you’re planning to buy an existing franchise unit or store (rather than starting a new one from scratch), an acquisition loan provides the funds to purchase that business. The buyer could be an existing franchisee expanding their portfolio, or a new entrepreneur purchasing a franchise location from a current owner. Acquisition financing is used in franchise resales, transfers, or even buying out a partner’s share.

In general, these loans are for those looking to make a major investment to grow their business. Ideal candidates are usually experienced franchise operators with a track record of success (for expansion) or entrepreneurs buying a proven franchise location (for acquisition). Lenders will expect a solid plan for how the new investment will be managed and grown. Typically, you’d consider this if the franchise (or location) you’re acquiring has a strong performance history or your existing franchise is doing well enough to warrant replication.

Expansion and acquisition loans can be among the larger financing amounts in franchising because they’re funding entire businesses or new outlets. The loan amount will depend on the specific opportunity:

• For Expansion (New Unit Development): The amount often corresponds to the startup cost of the new franchise unit. This could range widely – perhaps $100,000 to $500,000 for a relatively low-cost franchise concept, to $1 million or more for a bigger project (like a large restaurant or hotel franchise unit). If you plan to open multiple units, the financing could be several million in total (sometimes structured as individual loans for each unit).
• For Acquisitions (Buying an Existing Franchise): The loan amount would generally equal the purchase price of the business (minus any down payment you contribute). For a single-unit franchise resale, this might be, say, $150,000 for a small service franchise up to $1–$3 million for a well-established, high-revenue franchise restaurant or store. According to industry data, lenders often finance around 70–80% of the business’s value, which means you might see loan amounts covering that portion. If real estate is included in the sale (like the property of a restaurant), the loan could be larger and possibly split between a business loan and a real estate mortgage.

The SBA 7(a) program, a common source for franchise expansion/acquisition financing, has a max of $5 million , which often is sufficient for single or a few units. If larger expansions are needed (beyond $5M), some franchisees turn to multiple financing sources or conventional loans. In any case, these loans are typically six or seven figures. Lenders will carefully look at the deal to ensure the loan amount is justified by the business’s financials (in an acquisition) or by the projected costs and returns (in an expansion). Often, a professional business valuation or appraisal is involved for acquisitions to set a fair loan amount.

Interest rates for expansion and acquisition loans tend to be similar to other long-term small business loans, often leaning towards the lower side if backed by strong collateral or SBA guarantees. If you go through a bank or SBA lender, you might expect rates in the single digits or low teens. For instance, bank business loan averages ranged roughly from 6.4% to 12.5% as of late 2024 . SBA 7(a) loans used for business acquisition or expansion would likely be somewhere around prime rate plus a margin (currently landing around 10–11% as of 2025, similar to other SBA loans discussed earlier). Some expansion loans might even combine an SBA 504 loan (for any real estate portion) at an even lower fixed rate ~6–7% with a 7(a) or bank loan for the remainder.

If you pursue seller financing (where the seller lets you pay them over time for part of the price), the “interest” could be negotiable, often in a comparable range (or slightly higher due to the convenience).

For those who don’t qualify for bank/SBA financing and seek alternative lenders, interest might be higher – possibly low to mid-teens – because the loan size is big and risk is higher. However, most franchise expansion/acquisition deals that are solid will go the SBA or bank route due to the more favorable rates.

In summary, expect interest rates that are on par with standard business loans – not as cheap as a home mortgage, but quite reasonable especially if using SBA or collateralized loans. The better your credit and business financials, the closer to the lower end of that range you’ll get.

Expansion and acquisition loans typically have medium to long repayment terms, ensuring payments are manageable given the large loan sizes:

• Standard Term: Many of these loans come with terms of 5 to 10 years. For example, a loan to purchase an existing franchise might be a 7-year term loan. This timeframe balances paying off the debt in a reasonable period with not overburdening the monthly cash flow.
• Real Estate Component: If the expansion involves buying real estate (like building or purchasing a property for a new location), that portion of financing can often be stretched to 20–25 years (through an SBA 504 or a commercial mortgage). The business-only portion would still be shorter. Sometimes lenders structure it as two loans: a long-term loan for real estate, and a shorter-term loan for the business assets/intangibles.
• Aligning with Franchise Agreement: Interestingly, some conventional lenders will align the loan term with the length of your franchise agreement or lease. For instance, if your franchise agreement has 10 years remaining, the lender might ensure the loan is fully paid by then (so that you aren’t paying a loan on a franchise you no longer have rights to operate).

Most expansion/acquisition loans are fully amortizing term loans with monthly payments. SBA 7(a) loans used for these purposes allow up to 10-year terms for business purchase or expansion costs, which is common. If using an SBA 504 for real estate, that portion could be 25-year. So, in practice, a combined financing might be, say, a 10-year term on $500k of business goodwill, and 25-year term on $800k of real estate.

There are usually no prepayment penalties on 7(a) loans under 15 years, and even for those longer, prepayment fees typically disappear after the first 3 years. This means if your new franchise unit or acquired business throws off a lot of cash, you can pay down the loan faster.

Overall, expect to be repaying an expansion/acquisition loan for anywhere from 5 to 10 years in most cases (longer if real estate is in the mix). That gives you time to grow the business and make the payments comfortably out of earnings.

When seeking an expansion or acquisition loan, lenders will scrutinize both you and the business opportunity. Key factors include:

• Business Financials & Performance: For an acquisition, the historical performance of the existing franchise is paramount. Lenders will examine its revenue, profitability, and cash flow to ensure it can support the debt. They’ll likely request several years of the business’s financial statements and tax returns. For an expansion (new unit), if you’re an existing franchisee, your current franchise’s performance will be considered an indicator (i.e., if your first store is thriving with good cash flow and margins, that strengthens your case to open a second).
• Down Payment / Equity: Expansion and acquisition loans usually require a significant down payment or equity injection from the borrower. This is often in the range of 10% to 30% of the total project or purchase price. SBA loans mandate at least 10% for business acquisitions, but many deals involve around 20% from the buyer. If you’re expanding, you might need to cover costs like franchise fees or some portion of build-out with your own cash. Lenders want to see you have skin in the game and that they’re not financing 100% of the growth.
• Collateral: These loans may be secured by various assets. In an acquisition, the target business’s assets (equipment, inventory, etc.) and possibly any real estate serve as collateral. Often, personal collateral (like home equity) might also be required if the loan isn’t fully covered by business assets. With expansion loans, if it’s primarily funding new location startup costs, the collateral might be the new equipment, maybe a second lien on your existing business assets, or other assets. The presence of solid collateral (like property) can increase the loan amount a lender is willing to extend and possibly improve terms.
• Experience and Management: Lenders typically expect that you (or your team) have the capability to successfully run the expanded operation. If you’re opening another unit, they’ll consider how you’ll manage multiple locations – do you have management staff or a plan in place? For acquisitions, if you’re new to this franchise, your relevant business experience matters. Many lenders view franchise systems favorably here because training and franchisor support can supplement experience, but they still like to see that you’re not completely green in business. Your personal resume and track record will factor into the approval.
• Creditworthiness: As with any loan, your personal credit score and credit history are important. Given the loan sizes, lenders may be even more cautious; a strong credit score (700+) will make them more comfortable. They’ll also look at your existing debt obligations. If you have other business or personal loans, they’ll ensure the new loan doesn’t stretch you too thin. For existing businesses, the business credit profile (if established) will be considered too.
• Franchise System Strength: The franchisor’s reputation and stability can play a role. If you’re expanding within a well-known, financially healthy franchise system, that’s a plus. Lenders might be slightly wary if the franchise brand is very new or has high failure rates, as that could affect the success of your new unit or the stability of the business you’re buying.
• Business Plan & Projections: Particularly for expansion loans, you’ll need to present a business plan with financial projections for the new location. Lenders will analyze these projections to see if they’re realistic – looking at metrics like projected sales ramp-up, profit margins, and break-even points. For acquisitions, you should outline how you plan to maintain or improve the business’s performance post-purchase (and account for any transition period).
• Valuation of the Business (for acquisition): The lender will often require an independent valuation or appraisal of the franchise you’re buying to ensure the price (and thus loan amount) is fair. If an appraisal comes in lower than the purchase price, the lender might lend only based on that lower value, meaning you’d have to either renegotiate the price or put more money down.

By addressing these factors – e.g., saving up a solid down payment, improving your credit, choosing a strong franchise brand, and thoroughly planning your expansion – you can greatly enhance your chances of approval and favorable terms for an expansion or acquisition loan.

Using financing to grow your franchise empire can offer numerous benefits:

• Accelerated Growth: The obvious advantage is that you can expand faster than if you had to save up all the money first. This means capturing market opportunities (like a great location becoming available or a competitor selling their store) when they arise. Loans enable you to leverage other people’s money to increase your income-generating assets now, rather than years later.
• Retaining Capital for Operations: By financing the expansion or acquisition, you avoid depleting your company’s or personal cash reserves entirely. You’ll have capital left for operational needs, marketing, and buffering any unforeseen expenses in the new venture. Essentially, the loan spreads out the big cost of growth, making it more financially feasible.
• Ownership of an Established Cash Flow (for acquisitions): When you buy an existing franchise with a loan, you’re acquiring a business that’s already generating revenue and possibly profit. That means from day one of ownership, you might have cash flow to help service the debt. If the business is healthy, it can be a self-sustaining purchase – the existing cash flow covers the loan payments and still provides you an income. It’s often less risky than opening a brand-new unit where you have to build sales from zero.
• Economies of Scale: With expansion, especially adding additional units, you can gain economies of scale. For instance, you might be able to do bulk purchasing for multiple locations (reducing cost of goods), or spread your marketing spend over more revenue. Some overhead can be shared. This can improve overall profitability across your franchise holdings, making the debt easier to pay and increasing your returns. Multi-unit franchisees often see better profit margins per unit after expansion.
• Increased Business Value: Taking on debt to expand can significantly increase your net worth in the long run. If you open a new franchise location that becomes profitable, the value of your business grows. The loan gets paid down over time while the business asset (the new unit) appreciates or generates equity. If you ever sell your multi-unit operation, you could potentially fetch a much higher price. In short, you’re using leverage to build equity in more businesses.
• Flexible Use of Funds: Expansion loans, especially under SBA 7(a), allow you to use the money for a variety of needs – buying out an owner (if acquisition), purchasing equipment, funding tenant improvements, hiring initial staff, etc. It’s comprehensive financing for the whole project. Similarly, acquisition loans cover buying the business assets and often include some working capital if structured that way, so you have a cushion after the purchase. This one-loan-for-all can simplify the process versus patching together different funding sources.
• Possibility of Better Terms via SBA or Franchisor Programs: Many lenders view franchise expansion/acquisitions positively, particularly if you’ve shown success. If you’ve been a good operator, you might find banks offering good terms or the franchisor might have relationships with lenders for multi-unit growth. Sometimes franchisors even have incentives (like reduced franchise fees) for expansion, which effectively make your needed loan smaller.

It’s important to weigh the challenges and risks of taking on debt for expansion:

• Significant Debt Burden: You will be taking on a large loan, which means substantial monthly payments. This adds financial risk – if the new location or acquired business doesn’t perform as expected, you still must pay the debt. A downturn in one unit could potentially jeopardize your whole operation if the costs are shared. It’s a big commitment to repay hundreds of thousands (or millions) over time, and defaulting could lead to losing collateral or even bankruptcy.
• Need for Personal Investment: As noted, you’ll likely need to put down a hefty down payment. This could mean tying up a lot of your personal savings or liquidating other investments. If the expansion doesn’t pan out, that equity could be lost. Furthermore, lenders often require personal guarantees, so your personal assets are on the line until the loan is repaid.
• Complex and Time-Consuming Process: Securing an expansion or acquisition loan can be an involved process. You’ll have to prepare detailed documents, negotiate purchase agreements, possibly go through business valuations, and endure thorough lender due diligence. It’s not as quick or simple as getting a small working capital loan. The transaction (especially acquisitions) can take a few months to finalize with financing. This can be stressful and divert time from running your existing franchise.
• Integration and Management Challenges: On the non-financial side – expanding means you’ll have more to manage. Running multiple locations or integrating a newly acquired store comes with operational challenges. You may need to hire more managers, train new staff, and ensure the franchise standards are maintained across units. If your attention is split, there’s a risk that your original business performance could suffer, which in turn could strain your finances. In short, growth increases complexity.
• Collateral and Security Requirements: You might have to pledge collateral that you’re uncomfortable with. For example, a lender might require a lien on your first franchise location or your personal real estate to secure the expansion loan. This means those assets are at risk if things go wrong. Also, carrying a lot of business debt can make it harder to borrow for other needs – it somewhat ties up your borrowing capacity.
• Economic and Market Risks: Taking on debt to expand makes you more vulnerable to broader market conditions. If the economy falters, interest rates rise (if you have a variable rate loan), or the franchisor runs into problems, your new investment could underperform. You’re essentially doubling down on the franchise brand and the market – which can amplify both gains and losses. For instance, imagine financing an expansion only for a pandemic or recession to hit – sales might drop, yet your loan payments remain fixed.
• Post-Expansion Cash Flow Constraints: In the initial phase of expansion or after acquisition, you might find that cash is tight. Perhaps the new unit hasn’t hit its stride yet or you need to invest additional money. That, combined with loan payments, could strain your overall business’s cash flow. It can mean taking less income for yourself until things stabilize.

In essence, while expansion and acquisition loans enable growth, they also raise the stakes. It’s often said in business: “don’t expand just for the sake of expanding” – you want to be confident in the opportunity and prepared for the responsibilities and risks that come with scaling up using debt.