Buying a Franchise in Australia: Check Personal Guarantees

Buying through a company does not necessarily keep your personal assets separate from franchise debts. A personal guarantee can expose you to liabilities if that company cannot meet its obligations. Before joining Australia’s franchising community, investigate every guarantee requested by the franchisor, lender or another contracting party—not just the headline investment. Understanding the potential loss is as important as understanding the opportunity.

1. Identify every personal commitment

A guarantee is a promise to answer for another party’s obligations. For example, you might guarantee payments owed by the company that operates your franchise. If the company defaults, the creditor may be able to pursue you personally, depending on the wording.

An indemnity is different: it can create a separate obligation to compensate another party for specified losses. Documents often combine guarantees and indemnities, so do not assume a heading tells you the full extent of your exposure.

Ask your solicitor to build a schedule covering:

• Who gives each guarantee, including directors, shareholders or family members.
• Which entity receives it and which business obligations it covers.
• Whether liability is capped or unlimited.
• Whether it includes interest, enforcement costs, damages or future debts.
• What must happen before the creditor can make a demand.
• Whether any personal asset is offered as security.

A guarantee is not the same as a mortgage or other security, but an unsecured guarantee can still expose personal assets through debt enforcement. Establish exactly what documents you are being asked to sign and in which capacity.

2. Check the legal protections without assuming immunity

Australia’s franchising community is specifically regulated by the Franchising Code of Conduct, a mandatory code under the Competition and Consumer Act 2010. The current Code commenced on 1 April 2025, with some additional requirements applying from 1 November 2025. The Australian Competition and Consumer Commission enforces the Code.

The Code regulates franchise agreements and includes disclosure and good-faith obligations. These protections do not automatically cancel a personal guarantee or turn a commercially risky commitment into a safe one. A lender’s separate finance documents also need their own legal review.

The Australian Consumer Law prohibits misleading or deceptive conduct and provides unfair contract terms protections for qualifying standard-form small business contracts. Separate protections can apply to financial products and services under the Australian Securities and Investments Commission Act 2001. Your solicitor should assess which rules cover each document and whether a particular term is challengeable.

Do not sign on the assumption that an onerous clause must be unenforceable. Whether a term is legally unfair depends on the applicable law and circumstances, not simply whether it disadvantages you.

Arrange advice for each proposed guarantor. Where personal interests differ, separate independent advice may be necessary—particularly if a spouse or relative is being asked to support a business they will not control.

3. Negotiate the boundaries before committing

A request for a guarantee is a starting point for scrutiny, not proof that every provision is essential. Ask why it is needed and whether a narrower commitment would satisfy the creditor.

Useful negotiating points include:

• A monetary cap: identify whether interest and legal costs sit inside or outside it.
• Defined obligations: limit the guarantee to specified debts rather than every obligation owed to the creditor or related entities.
• A fixed duration: avoid assuming liability ends when the initial franchise term expires.
• Controls on changes: ask whether renewals, extensions or increases in borrowing can expand your exposure without fresh consent.
• Release conditions: specify when and how you can obtain a written release.

Watch for “joint and several” liability. This can allow a creditor to pursue one guarantor for the whole covered debt rather than an equal share. A private agreement between business partners about splitting losses does not necessarily restrict the creditor’s rights.

Also check what happens if you resign as a director or leave the business. Neither event should be treated as an automatic release. Obtain negotiated changes in the executed documents, not merely in a salesperson’s email or verbal assurance.

4. Stress-test your household exposure

Ask your accountant to model a downside case in which trading stops but debts remain. Include outstanding finance, franchise liabilities and other guaranteed commitments. Distinguish between the company’s debts, your guaranteed exposure and assets specifically pledged as security, avoiding double-counting.

Then consider the household consequences: reduced income, ongoing living costs and the possibility that several creditors make demands around the same time. Do not assume business failure affects only the money initially invested.

Keep signed guarantees, variations and releases together, with a diary of review dates. Revisit them before refinancing, renewing or changing the ownership structure.

Practical takeaway: Before signing, obtain a written summary of each guarantee’s scope, maximum exposure and release conditions. If you cannot explain what you could personally lose, pause the purchase and seek independent advice.