Buying a franchise: take care with personal guarantees

People often enter franchising through a company. However, this does not mean that your personal assets will always remain outside the business arrangement. A personal guarantee given to the franchisor, bank or landlord of the premises can create a separate liability. Before choosing a franchise network and signing, consider not only what your company will pay, but also what you could be required to pay personally.

1. Identify where you are taking on personal liability

A guarantee is not always set out in a standalone document with a clearly visible heading. It may appear in the final pages of the franchise agreement, in a financing appendix, in the lease or in a supplier credit agreement. Signing as the company's legal representative must be clearly distinguished from signing as an individual guarantor.

Ask for all draft agreements and draw up a single checklist:

• Who is the creditor, and which company owes the debt?
• Who is signing as guarantor?
• Which specific obligations are covered?
• Is there a maximum amount and an expiry date?
• Is the guarantee linked to other security, such as a mortgage or pledge?

Do not treat the guarantee as a mere formality that is “required of everyone”. Even where a company's legal structure provides limited liability, a personal guarantee creates a separate contractual commitment. Any liability arising from your position as a member or manager of the company on other grounds also needs to be assessed separately: it is not the same as liability under a guarantee.

2. What Greek law provides

Greece has no specific law providing a comprehensive framework for franchising, nor a dedicated mandatory pre-contractual disclosure regime exclusively for these agreements. The general rules of the Greek Civil Code apply, along with relevant commercial provisions and, where applicable, competition law, including Law 3959/2011 and Article 101 of the Treaty on the Functioning of the European Union (TFEU).

Articles 847 onwards of the Civil Code are central to personal guarantees. By giving a guarantee, the guarantor assumes responsibility towards the creditor for payment of the debt. Under Article 849, the guarantee declaration must be in writing, subject to the specific exception provided for where the guarantor pays the debt.

Particular attention should be paid to the defence requiring prior enforcement against the principal debtor under Article 855 of the Civil Code, known in Greek as enstasi dizisis. Where the statutory conditions are met, this allows the guarantor to refuse payment until enforcement against the principal debtor has been attempted unsuccessfully. It does not apply in every case. Article 857 sets out circumstances in which it is excluded, including where the guarantor has waived it, particularly by guaranteeing as a principal debtor.

Wording such as “as a principal debtor” or “waiver of the defence requiring prior enforcement against the principal debtor” therefore has significant consequences. Ask an independent lawyer to explain each waiver. The duties of good faith during negotiations and potential pre-contractual liability are based on Articles 197–198 of the Civil Code, but they are no substitute for reviewing the documents before signing.

3. Negotiate the amount, scope and duration

The key question is not simply whether you will give a guarantee, but how specific and limited it will be. A general reference to “all present and future claims” may cover far more than the initial debt you have in mind.

Seek written agreement on:

• An overall cap: clarify whether this includes interest, costs and contractual penalties, or whether they are added separately.
• Specific debts: for example, only a specified financing arrangement, rather than all claims under every agreement governing the business relationship.
• A time limit: distinguish between the period in which covered debts may arise and the period in which payment can be claimed.
• Subsequent changes: establish whether an increase in credit, a renewal or a new agreement requires your fresh written consent.
• Notification arrangements: ensure you are notified of overdue payments and receive an itemised statement of the claim.

These are matters for negotiation, not rights automatically granted to every guarantor. If the creditor refuses a cap, ask why and consider alternative security with a more clearly defined scope. A bank guarantee is a different instrument, however, and may also require you to provide security.

4. Check your total exposure and how you will be released

Add together the guarantees given to all counterparties. Separate limits for the franchisor, bank and landlord can collectively create an exposure that is not apparent when you read each agreement in isolation. Ask your accountant to set out this exposure separately from the initial investment cost.

Test an adverse scenario: the company ceases trading with outstanding liabilities. Which claims could be brought against you, which security could be enforced, and which amounts remain unclear?

Do not assume that transferring the business, stepping down from management or the end of the franchise automatically terminates the guarantee. Agree a clear release procedure and obtain written confirmation from the creditor. Replacing you with another guarantor is not sufficient without the necessary agreement.

Practical takeaway: before signing, you need clear answers to four questions: whose obligations are you guaranteeing, which debts are covered, what is the maximum amount, and when will you be released? If any answer remains vague, the review is not complete.