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It is crucial that franchisees thoroughly understand a franchise agreement before deciding whether to join a franchise. Each franchisor will offer a uniquely drafted agreement. It is essential to carefully review the terms of any contract before signing. A franchisor may require you to provide a personal guarantee. This article will explain personal guarantees and what this means in franchising.
Personal Guarantees in Franchising
In franchising, a personal guarantee is a contractual commitment by an individual (the guarantor) to fulfil certain obligations and liabilities the franchisor stipulates within the franchise agreement.
If you enter a franchise agreement as an entity, such as a limited company, rather than an individual, this can limit your liability. However, you can still be personally liable if the franchisor asks you to sign a personal guarantee.
If you sign a personal guarantee and breach your obligations under the franchise agreement, you will be personally liable to the franchisor. For example, if your franchise business is unsuccessful and this breaches the franchise agreement, the franchisor could sue you. In this case, you would be personally liable. This action could have severe financial consequences. As you are personally liable, your assets, such as your house, could be at risk because you signed the guarantee.
The guarantee can encompass the terms of the agreement, including operational standards and financial obligations. Unless the contract expressly stipulates limits on the guarantee, it is unlimited. When more than one franchisee is involved in the franchise agreement, the franchisor might ask multiple individuals to provide personal guarantees.
It is critical to read all relevant materials when considering a franchise opportunity. A franchisor may include the personal guarantee within the text of the franchise agreement or as a separate schedule.
Legal Implications of a Personal Guarantee
Personal guarantees are legally binding. If you sign one and fail to meet certain obligations, the franchisor can enforce the guarantee. The franchisor will do this by bringing legal action against you. As such, personal guarantees carry severe potential consequences. Prospective franchisees must carefully consider these consequences before signing a personal guarantee.
Moreover, prospective franchisees must ensure that a franchise opportunity is a good business decision. Also, if you are a prospective franchisee, you should ensure the franchise agreement is suitable. As such, you should seek legal advice before you join a franchise. A franchise lawyer can help you determine the viability of your potential franchise business. Also, a franchise lawyer can identify any risks you need to be aware of that are contained in the franchise agreement.
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What to Do if the Franchisor Asks You to Sign a Personal Guarantee
1. Understand the Guarantee and the Agreement
If a franchisor asks you to sign a personal guarantee, take a step back and assess the situation. Try to set aside the compelling vision of your franchise business succeeding. You should carefully and objectively consider this request by your franchisor.
Deciding whether to join any franchise is a crucial financial decision. The implications of signing a personal guarantee can be severe. You need to carefully read through the franchise agreement to understand your obligations, exclusion clauses, and performance standards. Further, you should also see if there are any limits on the guarantee.
2. Assess Financial Viability
As a personal guarantee can make you incur financial liability, you need to assess the opportunity’s viability. Further, you need to determine whether you can meet the payment obligations. Beyond the initial investment, consider whether you can inject sufficient working capital into your newly acquired franchise business. You should also be able to handle any unexpected costs.
3. Seek Independent Legal Advice
You should seek advice on the franchise opportunity and ensure you are as informed as possible before making a final decision. A personal guarantee is a legally binding commitment. As such, you need to understand the scope of the guarantee. This includes the:
- duration of the guarantee; and
- circumstances under which the franchisor can invoke it.
4. Consider Negotiating
You could consider negotiating the personal guarantee with the franchisor. For example, if the guarantee is unlimited, you could ask the franchisor to limit it. Such limitations could include limiting your financial liability to a set amount. In some cases, franchisors may be willing to accept limitations or alternatives.
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Key Takeaways
A personal guarantee is a written promise made by an individual to perform each term of a contract. In franchising, the specific contract in question is the franchise agreement. Personal guarantees make an individual personally liable for contractual breaches. They also serve as a financial safety net for franchisors if their franchisees cannot meet specific obligations or default on particular terms.
Both franchisees and franchisors should understand personal guarantees. Franchisees, in particular, must be aware of the possible consequences should they sign one. It can be the difference between losing a franchise investment and becoming bankrupt or losing personal assets.
Prospective franchisees should seek legal advice to mitigate risk. An experienced franchise lawyer can advise you on the franchise agreement and any other essential documents related to the arrangement, such as a personal guarantee.
If you need help understanding your obligations under a personal guarantee and if it is too onerous, contact our experienced franchise lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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