The Franchise Contract: Understanding the Personal Guaranty
by Ed Teixeira
One of the most important provisions of a franchise agreement is the
personal guaranty. Itís important for prospective franchisees to fully
understand the reason why franchisors require this covenant and what the
implications are in the event the franchisee has problems. When performing
franchisor due diligence, keep this factor in mind.
Virtually every franchisor requires that its franchisees be individually
responsible for and guarantee all contractual commitments, including the
financial obligations, made by the corporate entity owning and operating the
Obtaining personal guarantees from individuals is a common practice for
lenders, creditors and landlords. Banks that lend money to a franchisee will
require the owner to personally guarantee repayment of the loan. Landlords
leasing space to franchises, almost always require the personal guarantee of
the franchise owner.
A personal guaranty provides the franchisor, with additional security in
the form of the assets of the guarantor, the franchisee. Otherwise, the
franchisor could be chasing corporate entities with virtually no assets.
Most personal guaranty provisions in the franchise agreement enable the
franchisor to immediately proceed against the individual guarantor
(franchisee) rather than the corporation operating the franchise. This is
because the individual franchisee is usually required to waive the right to
require the franchisor to proceed first against the franchisee's corporate
The personal guaranty provision is contained in the Franchise Agreement
and will include an exhibit of the agreement the individual must sign.
Most franchisors require that the spouse of the individual franchisee
execute the guaranty obligation. This allows the franchisor to pursue those
assets held jointly in the marriage, such as bank accounts, investments,
personal property and real estate.
Since franchises are typically granted to individuals, who usually
establish a corporation for liability or tax reasons, a franchisor views the
operation of the franchise resting with an individual rather than a
corporation. The franchisor uses the personal guaranty to protect its trade
secrets, enforce non-competes and recover monies owed by the franchisee.
Without this tool the franchisor would most likely pursue a shell
corporation with few assets.
Following are some of the obligations that a personal guaranty could be
- Royalty payments
- Advertising fund
- Claims and lawsuits
brought by third parties which the franchisee must indemnify the franchisor
- Other financial
It should be understood that most franchisors will refuse to waive the
requirement of a personal guaranty. However, the franchisor may be agreeable
to negotiating some changes which can make the guaranty less onerous. Your
franchise attorney can provide suggested language to the franchisor or the
franchisor may already have done this.
- Suggested modifications to ďsoftenĒ the personal guaranty:
- Cap the financial
amount under the personal guaranty.
- Limit the personal
guaranty to particular obligations.
- Third party claims
under the franchisee indemnity, should not be the responsibility of the
franchisee when itís followed franchisor policies and procedures.
- Request a process for
resolving disputed royalty payments to include a time extension.
- There should be 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 and corporate interests. Rarely, is
this requirement waived. Prospective franchisees should understand the
nature of this obligation when investigating a franchise opportunity,
especially when performing due diligence. Finally, be confident in your
decision to be a part of the franchise network.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached