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.