Q: I am interested in buying a franchise, but I went through bankruptcy about eight years ago in conjunction with a divorce. Will this prevent me from getting a good franchise, and do I have to disclose this to the franchise, since that was more than seven years ago?
A: A franchisor is looking for prospective franchisees who will be successful in their business. Franchises consider many factors in making this decision about any candidate; your personal financial history will certainly be one of those factors.
Keep this top of mind as you go through this process: Good franchisors ask these questions because they want you to succeed. This is not a process where they are trying to find a way to turn you down; rather, they want to make sure you have whatever you need for a positive outcome with their system.
Credit history is a relevant factor in many franchises. This is not only true because of your financial relationship with the franchise, but also because of the many other vendors you'll probably be working with. Here are just a few examples when credit history is important:
- If you need to get a loan to start your business, or you need to set up lines of credit to support the operation of your business. Whether you're trying to get a loan through the SBA or traditional financing, the first thing the lender does is order a credit report. If the franchisor knows you have a problem that will prevent you from getting financing, they want to let you know this right away.
- If you need to sign a lease for space to locate the business. Virtually all leases today require a personal guarantee from the tenant (that's you), and the landlord is going to run a credit report on you prior to accepting your guarantee. Bad credit can mean your business won't qualify for a site.
- If you participate in trade credit programs with vendors and suppliers of the franchise company. Many franchises depend on terms from these vendors to manage cash flow, and if your credit history precludes you from being approved by the vendor, you may not be able to succeed in the business.
It's easy to see from just these few examples that there might be challenges to your chances of success in a franchise based on your credit history--that's why the company wants this information. That said, a past problem in your credit history is not the end of the world and can often be overcome.
The key information that determines how big a problem you have is twofold. First, how many times have you actually had credit problems? Second, how long ago did these problems occur?
If you've had issues, but they were small, few in number and a long time ago (five years or more), it probably won't be an issue at all, especially if you can show a great credit track record in the years since you had these issues. If your problems are larger, more numerous or more current, then you'll probably have an issue.
In any case, you should absolutely disclose this type of information to the franchise if they ask. A good franchise company is going to find out anyway, because they'll order credit reports on you prior to approving you as a franchisee. If they find out you lied or misled them about your credit history, they'll turn you down in a heartbeat, so it's better to be upfront about this.
Many people have gone through a period where something goes wrong and their credit standing suffers as a result. It could be due to a divorce, job loss or many other factors. Then they fix the problem and move on, reestablishing a track record of responsible money management.
Franchisors and other vendors understand this. In your situation, even though the filing of bankruptcy is indicative of a very serious problem, it did take place quite a few years ago, and you have an easily understood reason for why the problem occurred. If you've had a great credit history since then, you should be able to work through this with most franchises.
Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.