Buying a Franchise

An old proverb reminds us that if you are searching for a jewel, it too often may be hiding in plain sight! Many aspiring entrepreneurs, surprisingly, overlook the profound opportunity to become the CEO/owner of a franchise. Their reasons vary: perceived limitations in size or growth potential, concerns about low margins, restricted flexibility, or even a misguided notion of “status.” However, a closer look reveals a far more compelling landscape.

According to the latest reports, 2024 is projected to see approximately 821,000 franchise “establishments” flourishing across the US, generating an economic output of roughly $893.9 billion and employing a staggering 8.9 million people. This is certainly not an insignificant niche; it’s a vibrant, substantial sector often underestimated.

A recent survey of 187 Entrepreneurship through Acquisition (EtA) businesses, acquired by Harvard Business School graduates over the past decade, unveils a surprising trend: 19 (a full 10%) chose to purchase franchise operations. Ten of these acquisitions occurred immediately upon graduation, with another nine pursued mid-career (See Blog Post: Mid-Career Searching)

These ventures were all self-funded, with an average earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 4.2x, ranging from 2.7x to 5.5x. The financial structures were robust: the median seller note constituted 20% of the purchase price, complemented by 15.5% outside equity, with the remainder skillfully financed through bank debt.

Delving into the nature of these franchise acquisitions, 55% were single-unit operations, while five notable examples spanned between 13 and 23 units. Employee counts demonstrated remarkable variability, from a nimble 8 to a substantial 300. The acquisition timeline for these searchers was surprisingly efficient, with a median of 12 months from search launch to close, and a range of 6 to 35 months. In one intriguing instance, an EtA searcher/CEO opted to “build” rather than “buy” a territory, developing seven car wash facilities from the ground up.

Why Choose a Franchise for Acquisition?

The allure of a franchise acquisition becomes clear when I hear directly from those who have navigated this path. Omar Simmons, of Exaltare Capital, commanded an impressive portfolio of over 100 Planet Fitness operations, articulating it succinctly: “franchises are good businesses at a decent price with solid growth prospects.” He highlights their “low-valuation multiples,” the inherent “‘buy and build’ opportunities for growth,” and the ability to “create and leverage our capital advantage.”

Richard Bi, who acquired a Paul Davis franchise, discovered that the “Brand awareness and operational support offered by a franchise network make the business more stable.” He also emphasized the significant intrinsic value of territorial protection, commonly provided by franchisors, which remains “independent of how well or poorly you run your business.” Interestingly, Bi found that “debt and raising equity were relatively easier.” He candidly admits, “I didn’t start my search looking for a franchise. To the contrary, my initial strategy was actually to avoid franchises with the only exception of day care.”

There’s a prevailing, albeit often unfounded, disdain for franchise businesses, as cited by Tyler Tuggle at Home Instead: “Some searchers seem to disregard franchises outright because of a perceived stigma.” However, he wisely counters, “At the right price, a good business is a good business even if it is a franchise. They come with a built-in marketing strategy and reputation.” Jon Sheedy, who acquired a restoration business in Indiana, echoed similar initial reservations: “I was actually looking to avoid buying a franchise, but the one I found was too compelling to pass up.” He discovered the immense benefit of belonging to a franchise system, which provides “the scale necessary to sign national-level agreements to become a sole provider with our payers.” Furthermore, being part of a franchise proved invaluable post-acquisition, as there were “dozens of helpful people thatg I could reach out to with questions in the network.”

Ian Cahn-Fuller with Massage Envy also mused about image perceptions: “Franchising gets a bad rap as boring and noncreative.” He challenges this notion, suggesting that searchers “might not appreciate that building a franchise business, especially a high-growth platform, is like building any other business and that you may be able to move faster and truly focus on scaling.” Another insightful searcher observed, “It is an area overlooked by other acquirers, with a lower entry multiple, and as long as the franchisor is on board, growth through acquisition is straightforward.”

Patrick Dunagan, an Anytime Fitness franchisee, found that “Preexisting processes and controls enable transition time after closing to be very smooth.” Another searcher/CEO who successfully acquired a multilocation tax preparation business with a partner highlighted the inherent advantages: “The proven business model is attractive to lenders and can make up for a perceived lack of searcher experience.” They also pointed out that “Franchise brokers can be extremely helpful with price setting and sourcing. Also, specialized franchise lawyers understand the nuances of the state franchise laws that protect franchisees.”

Contrasting Franchises with Other Search Businesses

Richard Bi at Paul Davis offers a crucial caution for the pre-closing phase: “view and treat the deal as a true three-way negotiation process with the seller, yourself, and the franchisor Not two-way like most search deals are.” He warns of potential deal-breakers arising from franchisor requirements around equity owners, financing types, or personal guarantees. His advice: “Approach the franchisor the same way you would approach sellers: with humility, respect, and sincerity. Protecting their franchise’s brand is of paramount importance.” Bi explains that “Franchise laws make it really hard to get rid of ‘bad’ franchisees once they’re in, so all franchisors desire to maintain tight control over who they allow into their network.” He concludes that “The larger and more established brands, in particular, view the process as a job interview—and rightfully so.”

While much remains similar to traditional seller prospecting, Tyler Tuggle at Home Instead notes, “There is a similar level of stress and worry about operations, P\&L, hiring and firing.” However, he underscores a critical differentiator: “Yet, the franchisee network offers industry knowledge and support not available in standalone businesses.” Ian Cahn-Fuller at Massage Envy vividly describes the experience: “You are building a business within a business and can move faster by leveraging tools, operational playbooks, marketing plans, etc. from the franchisor.” The trade-off, however, is clear: “you have less control as the franchisor ultimately owns the brand and business model.”

One searcher/CEO observed the delicate balance: “We are bound by a franchise agreement which may limit geography and nature of services, but in our case, we can set up our own processes and approach to sales/execution, which matters a lot to us.” They acknowledge, “Although we can target 10x growth, we are unlikely to achieve 100x without broadening our services outside the franchised network.”

Jon Sheedy, with his restoration business, highlighted both the similarities and distinct advantages: “The similarities are that I am still my own boss, make all of the decisions, and am ultimately responsible for all of the successes and failures my company has.” Crucially, he adds, “Also, I have help if I need it. If I get a job that is too large to handle with only my employees, then I can call the franchisor in for surge capacity that allows us to accept any size job.” The operational efficiencies are compelling: “I don’t have to think about designing or maintaining a website, marketing materials, employee uniforms, training materials, etc.” He calculates, “Essentially I am paying 7% of revenue for them to handle all of these functions, which may actually be cheaper than doing them all myself and frees me up to think about everything else I have to deal with on a day-to-day basis.”

Zack Belzberg at Dodds Doors in Canada, having thoroughly examined franchises before his search, articulated his ultimate decision: “For me, buying a small business was about working for myself and being in total control.” While I valued “the ability to scale quickly” in the franchisee model, he was also “concerned that I would ultimately be answering to someone who could influence my decisions.”

Beyond traditional franchisors, other business models exist, such as branded dealerships or distributors, which share similar characteristics. Sunny Kanneganti, at Mobile Sweep, acquired a business with a strong “affiliation” network, though not a formal franchise. He noted the benefits: “The 1-800-SWEEPER number has been a nice but not pivotal marketing phone line.” He particularly values the annual conference where “owners do a lot of cross-learning/sharing and are more open than in the trade conferences we participate in.” Additionally, the yearly benchmark study, aggregating everyone’s QuickBooks files, is “immensely helpful.”

What is the Reaction from Lenders and Investors?

The financial community often views franchises favorably. Tyler Tuggle at Home Instead explained, “Low purchase price multiples, industry tailwinds, and opportunity for growth were attractive to my bank.” Jon Sheedy reported, “My investors were delighted to see significant opportunity to roll out new service offerings developed by the franchisor but not yet active in my territory.”

Lenders, in particular, tend to be more favorably disposed to franchises, as Omar Simmons found with Planet Fitness: “Many brands have strength that allow a franchisee to get better terms than a similar business would without the benefit of a national company behind it.” Richard Bi at Paul Davis elaborated, “Banks will also look at past performances of other franchisees in the same network as an important factor in their approval process.” He highlighted the data-driven approach: “The SBA tracks historical default rates and charge-offs by franchisee.” Bi also noted that “Today, SBA loans are very attractive for both the business and the real estate.” He pointed to FranData, a third-party data service, that helps lenders assess the franchise network’s health. Furthermore, “some lenders are also more willing to look past a searcher’s lack of prior experience in the industry if the business is a franchise.”

Challenges and Opportunities Unique to Franchises

While advantageous, franchise acquisitions present their own set of unique challenges and opportunities. One searcher/CEO observed, “Getting the deal closed was hard; I had a very difficult seller.” Fortuitously, “the franchisor wanted him out of the picture as well, and they provided encouragement for him to go through with the deal.” Ian Cahn-Fuller at Massage Envy succinctly states the primary ongoing challenge: “Operating is the biggest challenge, even in a franchise system! Executing your operational plans and driving accountability throughout the organization is hard and hands-on work.”

Another franchise CEO reflected on the complexities of closing: “Closing required an amendment to the franchise agreement; I wanted an ‘evergreen’ clause added, which meant there was one more stakeholder and subsequent concern in getting across the finish line.” This added stakeholder also translates to “one more stakeholder to satisfy and monitor while running the business, which is an additional risk.” However, the upside was significant: “On the other hand, the franchisor welcomed the idea of high growth targets and more sophisticated ownership and management than with their other operators.”

Omar Simmons at Planet Fitness shared a unique hurdle: “We were their first institutionally owned franchise, and they had to get comfortable with no personal guarantees.” Michael Cianelli, at Tommy Car Wash System, explained that “the franchisor felt that we brought a level of fundraising and potential that they had not previously seen.” Similarly, Ian Cahn-Fuller at Massage Envy observed, “They were happy to partner with younger, hungrier franchisees who brought a new perspective to their brand.”

Advice for Searchers Investigating This Path

For those considering the franchise acquisition path, seasoned searchers offer invaluable advice. Ian Cahn-Fuller at Massage Envy champions partnership: “Find a way to partner with the franchisor; a strong relationship can make all the difference.” He also stresses thorough due diligence: “Do your homework—speak to as many franchisees and operators in the systems you like as possible. You can never be overprepared before entering a system.” Omar Simmons at Planet Fitness offers a relatable analogy: “Joining a brand can be a bit like joining a family; it can take time to understand the ‘unwritten rules.’”

A searcher/CEO with multiple fast-food units emphatically advises: “Talk to as many existing franchisees as possible about their experience and level of satisfaction with the brand because that at the end of the day is going to be the primary factor in determining your success.” They assert, “I’d rather be an average operator in a great brand than the best operator in a lousy one, no question!”

One searcher/CEO strongly recommends an early dive into critical documentation: “As early as possible, get your hands on the sellers Franchise Disclosure Document (FDD) and Franchise Agreement (FA) to determine if it is assignable and what the differences are between the FA and the ‘current’ version.” They also suggest leveraging public resources: “Many state agencies display disclosures on franchisors which can be useful: Link to California Site.”

Tyler Tuggle at Home Instead advises a pragmatic approach to fees: “Find out what your royalty fees are paying for. Do they provide marketing, operations support, or a helpful franchisee network? If you’re only getting the brand name, it may not be worth 5%–10% of top-line revenue.” Richard Bi at Paul Davis offers a crucial self-reflection: “Make sure you’re actually okay owning a franchise with the trade-off of less control/independence for the benefits of being part of a franchise network.” He emphasizes the importance of the franchisor relationship: “The relationship with the franchisor also can be positive and rewarding if you have the right expectations going in and embrace the spirit of partnership.” Bi also highlights a common operational reality: “Many franchises have the challenges of a blue-collar workforce. [See Blog Post: Managing a Blue-Collar Workforce.]” His ultimate warning: “If you feel going in that it’ll be too difficult and a contentious relationship, you should probably consider just moving on to pursue other opportunities.”

Jon Sheedy, with the restoration business, offers this actionable suggestion: “Make an informed choice by speaking to a lot of existing franchisees and asking them what issues they have had or heard of with the franchisor.” He advises that this “should be part of your diligence and include litigation history.” Furthermore, “Understand the long-term goals of the franchisor, and make sure their interests are aligned with yours.” Patrick Dunagan at Anytime Fitness offers a sober caution: “Be really careful you’re not buying yourself just a job. Strength and depth of the existing management is really key to your future growth.”

Finally, on a practical yet critical note, Michael Cianelli, at Tommy Car Wash System, advises: “Hire a very good franchise attorney to review franchise agreements. The fine print can make or break you! Franchise law is very unique. Get referrals from other searcher/CEOs.”

Conclusion

Entrepreneurship through Acquisition (EtA) fundamentally embraces flexibility and openness to unconventional options. A franchisee, with its unique characteristics, offers a compelling avenue to mitigate business risk. It’s certainly time to disregard the superficial concerns of image and status and instead, laser-focus on the overarching goal: successfully running a business and deploying your entrepreneurial and managerial prowess to create tangible value. The true “magic” of EtA lies less in the business itself and more in you – the intrepid entrepreneur! These “jewels,” indeed, are hiding in plain sight.

I collaborated with AJ Wasserstein from Yale and Peter Mistretta on an article with this topic, which yielded some great additional examples worth investigating. You can explore more in our note entitled: Exploring Franchisees as a Post-MBA Entrepreneurial Path.

Search on!!!

Published: 03/08/2021; Updated: 07/19/25 with Support from Google AI Pro