Buying a Franchise: Limit Your Personal Guarantee

When you join a franchise network, the franchisor, bank or other contracting parties may require a personal guarantee. This means your personal finances could be affected even if you operate through a Danish private limited company (ApS). You should therefore review the guarantee as a separate part of the purchase, rather than simply signing it along with the rest of the paperwork.

1. Understand when you are personally liable

A Danish private limited company is generally a separate legal entity whose owners are not personally liable for its debts. However, signing a personal guarantee creates a separate obligation to the party receiving it. The company structure does not protect you against that particular obligation.

If you operate as a sole trader, you are already personally liable for the business's debts. Your choice of business structure and any security requirements therefore need to be assessed together.

Pay particular attention to these terms:

• Guarantee payable on the debtor's default (selvskyldnerkaution): The creditor can generally demand payment from you once the guaranteed payment obligation is in default, without first exhausting its options against the company.
• Guarantee conditional on the debtor's inability to pay (simpel kaution): The creditor must generally first establish that the principal debtor cannot pay.
• Joint and several liability (solidarisk hæftelse): If several guarantors are jointly and severally liable, the creditor may, under the terms of the guarantee, demand the full amount covered from any one of them.

An internal agreement between you and a co-owner to share the risk does not automatically limit the creditor's claim. Have both the guarantee given to the creditor and your internal risk-sharing arrangement reviewed.

2. Know the Danish rules — and their limits

Denmark has no specific franchise law. Nor are there franchise-specific requirements for a pre-contractual disclosure document or a special public register of franchise agreements. General requirements, such as business registration, still apply.

Franchise agreements and related guarantees are assessed under general contract law, including the Danish Contracts Act (aftaleloven). Section 36 of that Act allows unreasonable contract terms to be amended or set aside, but this is not a safety net on which to base your decision. In commercial relationships, the agreed terms carry considerable weight.

The Danish Competition Act and Marketing Practices Act may also be relevant to the franchise relationship. The absence of a mandatory franchise disclosure document does not mean that misleading statements or omissions can never have legal consequences.

Where a guarantee is given to a bank, specific provisions of the Danish Financial Business Act may be relevant. Their effect depends, among other things, on whether the guarantee is given in a business or non-business context. You should therefore not assume that rules protecting private guarantors automatically protect you when you guarantee the debts of your own franchise company.

Codes of ethics for franchise networks are not legislation and do not replace an assessment of your specific liability.

3. Map out every potential claim against your personal finances

Ask for drafts of all guarantees and security documents before agreeing to the purchase. Requirements may appear in the franchise agreement, a separate schedule, the bank's loan documents or agreements covering items such as equipment.

Prepare a summary with one row for each creditor. Record:

• Who is giving the guarantee and which business owes the debt.
• Which obligations the guarantee covers.
• The maximum liability, plus any interest and costs payable above that cap.
• When the guarantee can be enforced.
• How and when you will be released.

Be particularly alert to wording such as ‘all present and future obligations’. This may cover more than the debt in front of you when you sign. Also check whether claims for damages, contractual penalties or subsequent changes to the agreement could fall within its scope.

Ask your adviser to draw up a stress scenario: the business closes, several creditors demand payment at once, and the company's assets cover only part of the debt. How much could you face in total personally? A cap in each individual document does not necessarily add up to a manageable overall limit.

4. Negotiate the amount, scope and release terms

A guarantee does not have to be a choice between unlimited liability and no guarantee at all. Try to link the security to a specific risk and a clearly defined period.

Points to negotiate include:

• An overall financial cap: State explicitly whether interest, fees and recovery costs are included.
• Clearly defined claims: Limit the guarantee to specified payment obligations rather than every conceivable claim.
• A reducing cap: Agree that the cap will fall following documented on-time payments or repayment of a particular debt.
• Changes: Require your written consent before the guarantee is extended to new obligations.
• Release: Set out precise conditions and require written confirmation.

An expiry date needs particular care. Does it mean that new obligations are no longer covered, or that all claims against you fall away? These are not the same thing. Selling the company or stepping down from management does not automatically release you from an existing guarantee either.

5. Treat the guarantee as a separate decision

Have a lawyer assess the wording, and ask your accountant or financial adviser to compare the maximum exposure with your personal financial position. Also check whether any proposed alternative security simply shifts the risk elsewhere, for example to your home.

Only sign once the negotiated limits appear in the binding documents. A verbal assurance that the guarantee will ‘never be used’ does not change its financial implications.

Practical takeaway: Understand your total personal exposure, insist on clearly defined limits, and have the release terms set out in writing before committing to the franchise network.