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.
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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 in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.