Buying a franchise: what protection does a parent company guarantee offer?

When joining a franchise network, you may have to pay a substantial sum before receiving training, access to the system or other start-up services. If the company you are contracting with has a well-known parent company, that may feel reassuring. However, belonging to a corporate group does not, in itself, mean that the parent company will refund your money if the franchisor fails to perform. That may require a separate, properly drafted undertaking.

1. Look beyond the group name: identify who is liable

First, establish which company you are entering into the franchise agreement with and whose bank account you will be paying into. Ask for its full company name, company registration number, registered office and details of its representative. Check the same information for the company that is supposedly guaranteeing performance.

The parent company and its subsidiary are separate legal entities. As a general rule, ownership does not automatically make the parent company liable for its subsidiary’s contractual debts. Shared branding, a common director or the group’s corporate brochure is no substitute for a binding agreement providing security.

This is particularly important if a foreign company owns the brand but your contract is with a Hungarian business. The brand owner, the parent company and the company actually providing the services are not necessarily the same entity.

Ask for a simple written explanation of the respective roles: who receives your payment, who must perform the services and who accepts liability if that does not happen. If you do not receive a clear answer, do not assume the security arrangements are settled. A group structure chart can be helpful, but it cannot replace a binding undertaking.

2. Do not settle for a general letter of support

Hungary has no standalone franchise law covering every aspect of the relationship, but franchising is not unregulated. Act V of 2013, the Hungarian Civil Code, contains specific provisions on franchise agreements. Separate Civil Code rules also govern suretyships and guarantees. There is no universally mandatory, standardised franchise disclosure document, so do not assume that parent company security is protection you receive automatically.

A statement such as “our group supports the Hungarian operation” does not necessarily give you a directly enforceable right to payment. What matters is the document’s substance, not its title.

Under a suretyship (kezesség), the surety undertakes to the creditor to perform in the debtor’s place if the debtor fails to do so. A suretyship agreement must be in writing. With an ordinary suretyship, the surety may, subject to certain conditions, require the creditor to pursue recovery from the debtor first. With a készfizető kezesség, the surety cannot rely on that defence. This distinction affects how you can enforce your claim.

A guarantee (garancia) is a different form of security, whose terms need to be assessed separately. Although “parent company guarantee” is a common umbrella term in English, do not treat garancia and kezesség as interchangeable during negotiations in Hungary. Ask a lawyer to establish which arrangement meets your needs and whether the draft actually creates it.

3. Define exactly which claims are covered

A parent company suretyship does not automatically remedy missing training or the handover of an unusable system. To protect payments made before opening, you need to establish when you acquire a right to a refund or another monetary claim against the franchisor, and whether the suretyship covers that claim.

Review the security document alongside the franchise agreement. At a minimum, address the following questions:

• Creditor: can your operating company demand performance directly?
• Secured debt: exactly which refunds or other payment obligations does the suretyship cover?
• Financial limit: is there a cap, and does it include ancillary amounts, such as interest, and the costs of enforcing the claim?
• Duration: how long does the security remain in force, and what is the deadline for making a claim?
• Procedure: what notice and supporting documents are required to demand performance?

For example, protection may be incomplete if the parent company only guarantees repayment of a specified initial franchise fee, while the agreement also requires a separate start-up services fee. There is a similar problem if the security expires before your refund claim for non-performance can become due.

Have the scope of cover checked whenever the agreement is amended. A further advance payment or a revised delivery schedule will not necessarily fall within the existing undertaking automatically.

4. Check the security before you pay

The value of a suretyship depends both on the surety’s ability to pay and on whether the claim can actually be enforced. A signature from a financially weak parent company does not make the transaction safe. Check its available financial statements and the signatory’s authority to act on its behalf. For a foreign company, check the relevant local register as well.

Where the surety is based abroad, the governing law, the court with jurisdiction and the enforceability of any judgment require separate consideration. Discuss the costs and practical obstacles with your legal adviser before accepting the arrangement. An impressive-sounding undertaking is less useful if the route to enforcement is unclear.

Use the payment schedule to reduce risk too. Where possible, divide substantial advance payments into instalments linked to verifiable delivery milestones. Specify which handover document or other evidence will trigger each payment. If the suretyship is a condition of your deal, make sure it is properly signed before you pay.

Practical takeaway: do not pay upfront on the strength of a corporate group’s reputation. Be clear about who owes you money, which claims the parent company accepts liability for and how you can enforce that undertaking.