Buying a franchise: how to limit a personal guarantee

Joining a franchise network through your own company does not always keep your personal assets separate from business risk. If the franchisor asks for a personal guarantee, you may take on a separate obligation as an individual alongside signing on behalf of the company. Before agreeing, establish which debts you will be liable for, for how long and under what conditions the creditor can demand payment from you.

1. Distinguish between signing as a director and giving a personal guarantee

When you sign a contract as an authorised representative of a limited liability company, the contracting party is generally the company. A personal guarantee creates an additional obligation: the franchisor can seek payment from the guarantor under the conditions set by law and the contract. It is not merely an administrative confirmation that you are serious about your business plan.

Croatia has no specific law comprehensively governing franchise agreements, nor a mandatory franchise-specific pre-contractual disclosure form. The Civil Obligations Act applies to the contractual relationship and the guarantee, while the Companies Act governs the position of the company, its members and its representatives. Depending on the nature of the business relationship, other general legislation also applies, including competition rules.

The European Code of Ethics for Franchising is not law and does not replace a review of the guarantee document. Under the Civil Obligations Act, a guarantee declaration must be in writing to bind the guarantor.

Ask for all the documents you will need to sign: the agreement, schedules, any separate guarantee and any additional security documents. Pay particular attention to places where your name appears without stating that you are acting solely as the company’s representative.

2. Establish which obligations you are personally liable for

The greatest risk is not necessarily the size of the initial fee, but broad wording such as “all present and future obligations of the franchisee”. Depending on the specific contractual provisions, this can cover considerably more than regular franchise fees.

Draw up a list of potential claims and ask whether each is covered by the guarantee:

• unpaid initial and ongoing franchise fees;
• contributions to shared marketing;
• obligations arising from purchasing supplies or using business software;
• damages and contractual penalties;
• interest, legal costs and debt recovery costs.

Also check who you are giving the guarantee to. The franchisor, its associated supplier and another company within the same group are not automatically the same creditor. The guarantee should not cover obligations to all present and future related parties in undefined terms.

How payment can be pursued also matters. Where you are a joint and several guarantor (jamac platac), the creditor may seek payment from the principal debtor, the guarantor or both at the same time. For guarantees of obligations arising under commercial contracts, the Civil Obligations Act provides for this form of liability unless otherwise agreed. Do not assume that the franchisor must first exhaust its attempts to recover payment from the company’s assets.

3. Negotiate the amount, duration and changes

A request for a guarantee does not necessarily mean you have to accept unlimited personal liability. Propose an arrangement that gives the franchisor reasonable security while allowing you to assess your worst-case financial exposure.

First, ask for an overall cap on liability. The wording must make clear whether interest and costs fall within that cap or are payable on top. Also clarify whether the cap limits your total liability over the entire relationship or is an amount that is “reinstated” after each payment.

Next, define the guarantee’s duration. Distinguish between the last date on which covered obligations can arise and the deadline for making a claim against the guarantor for obligations that have already arisen. The end of the franchise agreement does not necessarily end your liability for earlier debts.

You could propose a gradual reduction in the guarantee following a period of satisfactory business performance, or its release in exchange for alternative security. These are negotiating options, not automatic statutory rights.

Specifically address the effect of renewing the agreement, opening an additional location and taking on new obligations. Ask for any agreed extension of your personal guarantee to require your separate written consent, rather than giving advance consent to unspecified future changes.

4. Agree how to exit the guarantee before entering into it

Selling your shares, changing the director or ceasing to work at the outlet does not, in itself, release you from a personal guarantee. When buying the franchise, agree the conditions under which you can obtain a written release from the creditor.

Ask for a final reconciliation procedure: who confirms the outstanding obligations, how disputed items are resolved and when additional security instruments are returned or cancelled. If you are asked to provide a Croatian debt enforcement instrument known as a zadužnica, or another document that facilitates enforced recovery, a lawyer should separately review its scope and consistency with the agreed guarantee cap.

Practical takeaway: before signing, you should be able to state clearly who you are giving the guarantee to, what it covers, the overall limit on your liability and when that liability ends. If the answers depend on unclear wording, ask for the documents to be revised before backing the business venture with your personal assets.