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Understanding the Personal Guaranty In The Franchise Agreement

Published on January 07, 2019

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Prospective franchisees must understand the personal guaranty in the franchise agreement.

Its important to recognize their obligations under the personal guaranty.  Franchisors require franchisees to personally guarantee their contractual and financial obligations in their franchise agreement to prevent franchisees from being insulated under their corporate entity.

Obtaining personal guarantees from individuals is a requirement that lenders, creditors and landlords all have. Firms that lend money to a franchisee require the owner to personally guarantee repayment of the loan and landlords leasing space to franchises will require the personal guarantee of the franchise owner.

In the case of a franchise, the personal guaranty provides the franchisor, with security utilizing the personal assets of the guarantor instead of relying upon a corporate entity with limited assets.

The franchisor must protect its trade secrets, enforce non-competes and recover monies owed by the franchisee and without a personal guaranty, a franchisor could pursue a corporation with few assets.

Personal guaranty provisions in the franchise agreement enable the franchisor to proceed against the individual guarantor (franchisee) in addition to the corporation operating the franchise. Most franchisors require the spouse of the individual franchisee to execute the personal guaranty. This allows the franchisor to pursue those assets held jointly in the marriage, such as bank accounts, investments, personal property and real estate.

Most franchisors will refuse to waive the personal guaranty but may agree to negotiate some changes.

Following are suggested modifications to the personal guaranty:

  • Limit or cap the dollar amount under the personal guaranty.
  • Limit the personal guaranty to specific obligations.
  • Third party claims under the franchisee indemnity, should not be the responsibility of the franchisee when it’s followed franchisor policies and procedures.
  • Request a process for resolving disputed royalty payments to include a time extension.
  • A franchisor indemnification provision that protects the franchisee from claims and reimburses for costs pertaining to the use of the franchisor marks, when used properly by the franchisee.

A personal guaranty provision in the franchise agreement is used by franchisors to protect its financial interests. This provision is rarely waived. Prospective franchisees should understand the implications of a personal guaranty when evaluating a franchise opportunity and when performing due diligence. Be confident in your decision to be a part of the franchise network because you’ll be required to personally guarantee your obligations.

About the Author: Ed Teixeira
Ed Teixeira is a recognized franchise expert with over 40 years’ experience in the franchise industry. He has served as a corporate executive for franchise firms in the retail, manufacturing, healthcare and technology industries and was a franchisee of a multi-million-dollar home healthcare franchise. Ed and Richard Chan are the authors of a new textbook, Franchising Strategies: The Entrepreneurs Guide to Success, to be published on July 1st by Routledge on July 1st. He has participated in the CEO Magazine Roundtable Meetings with business leaders from around the country and has spoken at a number of venues including the International Franchise Expo and Chinese Franchise Association in Shanghai, China. Over the course of his career, Ed has been involved with over 1,000 franchise locations and launched franchise concepts from existing business models. Ed can be contacted at [email protected].

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