Buying a Franchise: Limit Your Personal Guarantee

When you buy into a franchise network, the bank, landlord or franchisor may require a personal guarantee. This means your personal finances could be affected even if the business operates through a limited liability company. Treat the guarantee as a separate agreement to review: who does it protect, which claims does it cover, and how can you be released from it?

1. Identify all requirements for personal security

Start by gathering the franchise agreement, loan documents, lease and any supplier agreements. A guarantee may appear in a separate document, but it could also be included in a clause near the signature block or in a schedule.

Distinguish between the company's obligations and your own. Signing on behalf of the company does not necessarily mean giving a personal guarantee. Equally, do not assume that the company's limited liability protects you against a guarantee you have personally accepted.

Prepare a summary covering the following points:

• Creditor: Who can demand payment from you personally?
• Debtor: Which company's debts are you guaranteeing?
• Scope: Does the guarantee cover a specific loan or several types of claim?
• Financial limit: Is there a cap, and does anything fall outside it?
• Duration: When does the obligation end, and on what conditions?

Keep guarantees and security over assets distinct. A guarantee is a personal obligation to pay, whereas security over assets gives the creditor rights over specified assets. If you both give a guarantee and offer personal assets as security, your adviser should assess the combined risk and how the documents interact.

2. Understand the Danish legal framework

Denmark has no specific franchise legislation, no legally required standardised franchise disclosure pack and no dedicated public registration scheme for franchise agreements. General business registration requirements still apply, but registration does not mean that your personal risk has been assessed or approved.

The Danish Contracts Act and general principles of contract law are central to assessing a guarantee agreement. The Danish Marketing Practices Act may also be relevant to information provided during the sales process. Depending on the circumstances, general duties of disclosure and good faith may be significant if material facts are withheld or presented misleadingly.

Where a guarantee is given to a bank, the Danish Financial Business Act may also be relevant. Among other things, the rules distinguish between guarantees given in a business context and those given outside it. You should therefore not assume that protections for non-business guarantees apply automatically simply because you sign as an individual. Ask your adviser to establish how your particular guarantee should be classified.

There is no special franchise rule that automatically limits your guarantee to the amount you have invested in the company. Nor should you assume that a general cooling-off right applies. You therefore need to establish what protection you have before accepting the terms.

3. Negotiate the amount, scope and treatment of changes

A financial cap is an important starting point, but check how it is calculated. Establish whether interest, fees and debt recovery costs count towards the cap or can be claimed on top. Ask for a full explanation of your maximum exposure under the wording of the document.

Pay particular attention to wording covering all current and future obligations. This may extend further than the specific start-up loan or payment you intend to guarantee. Instead, propose that the guarantee be tied to clearly identified agreements and claims.

Have the type of guarantee explained to you as well. Under a Danish selvskyldnerkaution, the creditor can generally claim against the guarantor as soon as the debtor defaults on payment, without first having to establish that the debtor cannot pay. This could mean you face a demand much sooner than you expect.

Negotiate how later changes will affect the guarantee:

• Will an increase in the credit facility require your separate written consent?
• Will the guarantee cap reduce as repayments are made?
• Can new agreements or additional debts fall within its scope?
• How will you be informed about outstanding debt and payment difficulties?

If several owners give guarantees, you also need to understand whether the creditor can demand the entire guaranteed amount from any one of you. An internal agreement allocating liability between the owners does not, in itself, limit the creditor's rights.

4. Agree the release terms before signing

Selling the business or ending the franchise agreement does not necessarily release you from a separate guarantee. A new owner may take over the business while your existing guarantee remains in place, unless the creditor has agreed otherwise.

Ask for precise release terms. These might include repayment of a specified debt, expiry of an agreed period or approval of replacement security. Also establish whether claims that have already arisen remain covered after an end date.

If release requires the creditor's consent, the process should specify who must apply, what documentation is required and when the matter must be resolved. A promise from the franchisor cannot, by itself, release you from a guarantee given to the bank or landlord.

Finally, have your adviser review all personal guarantees and security arrangements together. Assess the impact on your personal finances if several creditors make claims at the same time, and keep a written record of every agreement to amend or release a guarantee or security arrangement.

Practical rule of thumb: Only sign once you can explain what you are liable for, how much is at risk and exactly what must happen for you to be released.