Buying a franchise: when your personal assets are at risk

When joining a franchise network, it is not enough to work out how much money you will invest in your own company. It is equally important to establish whether the franchisor, bank or landlord can require you to pay the company’s debts personally. An easily overlooked personal guarantee can change your exposure more significantly than the initial franchise fee. This guide looks at personal guarantees and other forms of security when buying a franchise in the Czech Republic.

1. Separate the company’s obligations from your own

A franchisee trades in their own name, for their own account and at their own risk. If you enter into the agreement as a sole trader, the business obligations are directly yours. If your Czech limited liability company (s.r.o.) enters into it, the company is generally the debtor. That does not, however, mean your personal assets are beyond creditors’ reach in every circumstance.

By law, shareholders in an s.r.o. are jointly and severally liable for the company’s debts up to the amount of outstanding capital contributions recorded in the Commercial Register when the creditor demands payment. However, you may also give a separate contractual guarantee, which is not limited by the payment of your capital contribution. A director’s potential liability for breaching their duties is a separate issue.

The Czech Republic has no specific franchise legislation. Franchise agreements are usually concluded as contracts not specifically defined by statute under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Sections 2018 onwards are relevant to guarantees; the position of shareholders in an s.r.o. is also governed by Act No. 90/2012 Coll., on Business Corporations.

There is no special registration requirement for franchise agreements, nor a mandatory standard pre-contractual disclosure document for franchises. General pre-contractual duties do apply, however. Do not assume that a special franchise approval process will protect you from taking on personal obligations.

2. Identify every document that binds you personally

Personal guarantees or security provisions need not appear in the franchise agreement itself. They may be contained in a separate declaration, loan documentation, a lease or an equipment supplier’s terms. Request all documents in advance and identify the capacity in which you are signing each one.

In particular, distinguish between the following:

• Guarantee: you undertake to pay the creditor if the debtor fails to pay and the statutory or agreed conditions are met. A guarantee declaration must be in writing.
• Joining an existing debt: you become an additional debtor alongside the company. This is more than a guarantor’s fallback obligation.
• Security over personal assets: a specific asset secures someone else’s debt. Providing an asset as security is not the same as giving a personal guarantee, but it can lead to that asset being sold to repay the debt.
• Notarial deed with consent to direct enforcement: if the relevant conditions are met, this may allow enforcement without first bringing court proceedings to establish the claim. Have its specific implications explained to you.

Signing on behalf of the company and signing in your personal capacity are two different things. Pay attention not only to the signature blocks, but also to clauses that identify a director or shareholder as a guarantor or co-debtor.

Prepare a simple summary covering the creditor, principal debtor, your role, the debts secured, the maximum amount and the conditions for release. Include all related contracts, not just the agreement with the franchisor.

3. Negotiate the amount, scope and duration of the guarantee

A requirement for security does not necessarily make an offer unacceptable. What matters is its scope. Wording that covers all present and future debts may extend far beyond an unpaid franchise fee.

Before signing, obtain written clarification of the following:

• Which specific contracts and types of claim does the guarantee cover?
• Does it also cover contractual penalties, interest, damages and recovery costs?
• Is the agreed limit an overall cap, or are some amounts payable on top of it?
• Does the guarantee extend to additional outlets, renewals of the relationship or subsequent amendments?
• What is the last date on which covered debts can arise, and when does the guarantee actually end?

Propose a fixed overall cap tied to a specific contract. Insist on your express written consent to any increase in your personal exposure. Simply limiting the period during which covered debts can arise does not necessarily end your guarantee for debts already incurred.

As well as checking the legal scope, test the financial impact. Add up your personal obligations to the franchisor, bank and landlord. Consider what would happen if the outlet stopped making money and several creditors demanded payment at once. This total is not an operating cost, but a measure of your potential personal exposure.

4. Secure access to information and a route to release

If you are to act as guarantor, you need early warning of problems. Negotiate a requirement for the creditor to notify you if the company falls into arrears, specify the amount owed and send demands to an agreed address. Do not rely solely on having access to the accounts as the current director: your role may change.

Agree the conditions for release in advance too, such as replacing the guarantee with another form of security or reducing it after an established record of timely payment. Selling your shareholding or stepping down as a director does not, in itself, usually end a contractual guarantee. You need appropriate legal arrangements and written confirmation from the creditor.

If the obligation could affect joint marital property or the family home, have those implications assessed separately. Do not treat a spouse’s signature as an administrative formality.

Practical takeaway: Before buying a franchise, you must be able to identify whom you are personally liable to, which debts are covered, the maximum amount involved and the conditions under which your obligation will end. Resolve any unclear or unlimited security arrangements before signing.