Buying a Franchise: Check Personal Liability and Guarantees

When joining a franchise network, most people expect their financial exposure to be clearly limited. Yet an additional signature can put personal assets at risk too: for example, by signing a suretyship, assuming joint liability for a debt or giving a personal guarantee. Before buying a franchise in Germany, check not only the obligations of your future business, but also which claims could be brought directly against you.

1. Separate the contracting parties from personal obligations

Start with a simple question: Who is supposed to sign each agreement, and in what capacity? As a sole trader, you are generally personally liable for business debts. With a GmbH (a German private limited liability company) or a UG (a lower-capital variant), liability for company debts is generally limited to the company's assets. However, this protection does not automatically cover additional obligations you take on personally. Statutory personal liability may also arise, for example from certain breaches of duty as a managing director.

If the franchise agreement names the company as the franchisee, make sure you clearly sign on its behalf. Also check all schedules and separate declarations. Provisions making you personally liable alongside the company may sit outside the main agreement and can easily be overlooked.

Take particular care if the company has not yet been entered in the German Commercial Register. Anyone acting on its behalf before registration may be personally liable under section 11(2) of the German Limited Liability Companies Act (GmbHG). Do not rush into signing in your own name on the assumption that the company will automatically take your place later.

Draw up an overview with four columns:

• the agreement and creditor, such as the franchisor, landlord or supplier;
• the intended contracting party;
• anyone taking on an additional personal obligation;
• the scope and duration of that obligation.

This will help you identify whether several creditors could pursue your personal assets at the same time.

2. Distinguish between suretyship, assumption of joint liability and an independent guarantee

The heading of a document is not a reliable guide to the risk it creates. What matters is its legal substance.

Under a suretyship (Bürgschaft), you undertake to the creditor to answer for another person's debt. The statutory rules are set out in sections 765 onwards of the German Civil Code (BGB). A suretyship generally depends on the existence of the underlying claim it secures. Check whether it covers only a specific debt or future obligations as well.

Creditors often require a suretyship waiving the defence of prior enforcement (selbstschuldnerische Bürgschaft). In particular, this means giving up the right to require the creditor to attempt enforcement against the principal debtor first. It does not, however, mean that every other defence is lost.

By assuming liability alongside an existing debtor (Schuldbeitritt), you take on an obligation of your own in addition to theirs. Where liability is joint and several, the creditor can generally require you to meet the entire obligation. Wording such as “The shareholder is also personally liable” should therefore never be treated as a mere formality.

An independent guarantee (Garantie) can go further than a suretyship because, depending on its terms, it creates a separate obligation to pay or perform. Provisions requiring payment on first demand are particularly sensitive. Obtain advice on the specific wording before signing.

For every form of security, ask for a clear answer to this question: what specific event allows which creditor to demand what amount from me?

3. Understand the German legal framework

Germany has no dedicated franchise statute or government franchise register. Personal security arrangements are governed principally by the German Civil Code, where applicable the German Commercial Code (HGB), and, for a GmbH or UG, the GmbHG. Membership of a franchise network provides no special statutory protection against personal liability commitments.

A suretyship declaration generally requires written form under section 766 BGB; electronic form is excluded. Section 350 HGB provides an important exception for suretyships that constitute commercial transactions on the surety's side. However, being a managing director or shareholder of a GmbH does not automatically make an individual a merchant for the purposes of German commercial law.

Pre-drafted liability clauses may be subject to the rules governing standard terms and conditions under sections 305 onwards BGB. Even in business-to-business dealings, transparency and the prohibition of unreasonable disadvantage under section 307 BGB are particularly important, subject to the specific provisions of section 310 BGB. Whether a clause is invalid depends on the circumstances of the case.

Do not therefore rely on apparent defects in form or assume that you can later have a far-reaching commitment set aside in court. Nor is a suretyship given by a family member automatically invalid simply because it exceeds their financial means; the legal requirements must be assessed separately.

4. Negotiate liability limits before signing

Security does not have to be unlimited. Discuss with the franchisor what specific risk it is intended to cover and whether a narrower arrangement would suffice. Practical negotiating points include:

• Overall cap: Is the maximum liability clearly limited, including interest and costs?
• Secured claims: Does the document cover only specifically identified obligations, rather than all present and future claims?
• Time limits: During which periods must obligations arise to be covered, and when does the right to call on the security end?
• Reduction and release: Does the security reduce as payments are made in accordance with the agreement, and under what conditions will it be released in full?
• Contract changes: What happens if the business expands or takes on additional obligations?

Have your adviser check expressly whether interest, legal recovery costs or contractual penalties can be added on top of any stated cap. Stepping down as managing director or selling your shares does not automatically end a personal security commitment either.

Practical takeaway: Sign only once the creditor, trigger, scope and release conditions are clearly defined for every personal security commitment. Have the franchise agreement and all liability documents reviewed together, rather than as separate pieces of paperwork.