By Ed Teixeira Chief Operating Officer at Franchise Grade.com
An important obligation in a franchise agreement is the personal guaranty. Although this provision will be cited in the Franchise Disclosure Document it may not get the attention of other items. Prospective franchisees should fully understand the obligations that the personal guarantee 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 franchise.
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 entity.
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.
Ed Teixeira Chief Operating Officer at Franchise Grade.com