Franchisors require virtually every person who buys a franchise to sign a personal guarantee, even if you plan to operate the franchise through a corporation or limited liability company. You should think twice (or more) before signing a personal guarantee, and you should consult a franchise lawyer.
A personal guarantee is a binding contract that makes you personally liable for performing every term of the franchise agreement. That includes not only operational terms, but also financial terms, liability for lost future royalties, attorneys’ fees, and non-competition covenants. You should assume that personal guarantees are enforceable. They generally are.
A personal guarantee is not a “standard form” or “normal” or “something you don’t need to worry about.” A personal guarantee means that if the franchised business fails, the franchisor can sue you, personally, for money damages. Business ventures fail every day. When they do, everyone who personally guaranteed a debt or obligation of that business (whether it be a franchise agreement, a lease, or a loan) is personally responsible for the entire balance of the obligation.
If you signed a personal guarantee, you have no defense. The franchisor or other creditor can call upon you without notice or warning to write a big check. In most cases, a creditor can have a judgment against you within about forty-five days. Your credit rating will plummet. The creditor can start collecting as early as 10 days after getting a judgment. They can seize your bank accounts, garnish your earnings, and place a lien on your house and other assets. You could go from comfortable to bankrupt in two months—all because of that “standard” personal guarantee.
In addition to the financial exposure, many personal guarantees extend to operational obligations. You agree to ensure the business operates strictly in accordance with the franchisor’s rules. You may not even know about those rules unless you are the operating person. The franchisor could sue you because an employee made a sandwich incorrectly or closed before midnight. If the underlying agreement has a non-compete, you are personally agreeing not to compete with the franchisor. If anyone asks you to sign such a document, you should consult with an experienced franchisee lawyer about ways to limit the scope of what they have asked you to sign. You may want to consider whether to sign at all.
Finally, many personal guarantees purport to remain in effect forever. That could mean you stay exposed to liability as a guarantor even after the franchise agreement (or other agreement) is terminated or transferred. If the franchisee sells to a third party, you could find yourself having guaranteed the performance of a third party you do not know and cannot control. You are also likely subject to post-termination restrictions, including non-compete and non-solicitation agreements. Whether or not you are the person operating the business, you should consult with an experienced franchise lawyer before signing a personal guarantee.
A personal guarantee is a serious undertaking. The franchisor or other beneficiary may present it as almost an afterthought. It may be buried in the back of a large stack of documents. However, it is one of the most consequential documents you will be asked to sign. It can make the difference between losing your franchise investment and losing your house. You should proceed with care and consult an experienced franchise lawyer before signing a personal guarantee or any document containing the word “guarantee”.