Buying a franchise: setting limits on personal guarantees

Joining a franchise network sometimes involves personally guaranteeing your company’s debts. Whether requested by a bank or a franchisor, this guarantee deserves a separate review from the franchise agreement. Before signing, establish exactly what you are guaranteeing, for how long and with what consequences for your personal assets.

1. Identify all the guarantees requested

Setting up a limited liability company is not enough to protect your personal assets if you guarantee its obligations. A personal guarantee is a contract under which you undertake to pay a creditor your company’s debt if the company fails to do so.

Do not look only for a document headed ‘personal guarantee’. The undertaking may appear in an appendix to a bank agreement, a separate document supplied by the franchisor or equipment finance paperwork. Other arrangements, such as an independent guarantee, follow different rules: have the legal nature of each document checked before accepting it.

For each request, note:

• the creditor benefiting from the guarantee and the company whose debts you are guaranteeing;
• the obligations covered: a specific loan, invoices, franchise fees or other sums;
• the maximum amount, any ancillary sums and any costs included;
• the duration and the conditions for ending the guarantee;
• whether it is an ordinary guarantee (cautionnement simple) or a joint and several guarantee (cautionnement solidaire).

A joint and several guarantee may allow the creditor to demand payment from you without first pursuing the company, depending on the terms of the document. It is therefore not merely an administrative formality.

2. Understand the protections available in France

France regulates pre-contractual disclosure in franchising, notably through Articles L. 330-3 and R. 330-1 of the Commercial Code, under the framework known as the ‘Doubin Law’. Where the relevant conditions apply, the pre-contractual disclosure document and draft agreement must be supplied at least twenty days before signing or making any advance payment. This period does not replace a specific review of personal guarantees.

Personal guarantees are governed primarily by the French Civil Code. For a new undertaking given by an individual, Article 2297 requires the guarantor personally to add a statement specifying, among other things, the nature of the undertaking and its limit for principal and ancillary sums, in both words and figures. Simply signing at the end of a clause is therefore not necessarily sufficient.

Article 2300 provides that a guarantee given by an individual to a professional creditor, which is manifestly disproportionate to the guarantor’s income and assets when entered into, is reduced to the amount they could afford to guarantee at that date. This mechanism does not amount to automatic cancellation.

Article 2299 also places a duty on a professional creditor to warn the guarantor when the principal debtor’s undertaking is beyond that debtor’s financial means. These protections are subject to specific conditions: do not sign on the assumption that future litigation will release you.

3. Assess your exposure and negotiate limits

Draw up an inventory of your existing and proposed guarantees with your accountant. Add up the maximum amounts rather than just the monthly repayments: several creditors may call on your guarantees if the business runs into difficulty.

Then consider an early closure scenario. Which debts would remain? How much could you be asked to pay? What resources would still be available if your remuneration as a director stopped at the same time? This assessment connects business risk with your family’s financial circumstances.

You can ask for the following, without assuming the creditor will agree:

• a specified cap that clearly covers principal, interest and ancillary sums;
• a guarantee limited to an identified debt rather than all future debts;
• a reduction in the cap according to an agreed timetable;
• a cut-off date for new debts covered by the guarantee;
• written release at specified milestones, subject to clearly defined conditions.

A guarantee provided by a third-party organisation does not necessarily remove the need for your personal guarantee. Check how the protections interact and who benefits from them. If your spouse needs to be involved, have the exact scope of their consent or their own undertaking explained: the consequences depend, in particular, on the matrimonial property regime governing your marriage.

4. Plan your exit before signing

Selling your shares, stepping down as a director or reaching the end of the franchise agreement does not automatically release you as guarantor. Distinguish between ending cover for new debts and the continuing obligation to pay debts already covered.

Ask how to obtain a formal release, who must grant it and whether a replacement guarantor will be required. A promise by the buyer to indemnify you is not equivalent to a release from the creditor.

Keep the signed documents, their appendices and any information received about the guaranteed debt. Before committing, have a lawyer check for inconsistencies between the cap, duration and exit clauses.

Key takeaway: before joining a franchise network, prepare a summary for each guarantee: beneficiary, debt, cap, duration and release arrangements. Any unclear answer should be clarified in writing before signing.