Franchise guarantees: when are your personal assets at risk?

Buying a franchise can put more than your business’s money at risk. If the franchisor asks you to personally guarantee your company’s obligations, you may also have to cover certain debts from your personal assets. Within a franchise network, asking for security may be a legitimate commercial requirement, but precisely what it covers matters. Treat a personal guarantee not as an administrative attachment, but as a financial decision in its own right.

1. Why does your company alone not protect you?

If you join a brand through a limited liability company, the company is generally responsible for its own debts. However, a personal guarantee you give as an owner creates a separate obligation: if the company fails to meet its obligations, you may also be required to pay under the terms of the guarantee. Even if the franchise agreement is in the company’s name, a separately signed guarantee can still put your personal assets at risk.

Hungary has no standalone, comprehensive franchise act, but Act V of 2013, the Hungarian Civil Code, specifically regulates franchise agreements. Guarantees are governed by the guarantee provisions of the same Act, alongside its general rules on contracts. A guarantee must be given in writing to be valid.

There is no general franchise rule requiring every franchisee to provide a personal guarantee. It is contractual security requested by the franchisor, and its scope is open to negotiation. Despite the general duties to cooperate and provide information, you still need to understand the personal risk you are taking on.

Distinguish between the capacities in which you sign: when are you signing as a managing director on behalf of the company, and when are you signing in your own name as guarantor? Both can occur in the same document.

2. Check what type of guarantee is being requested

The type of guarantee determines the circumstances in which the franchisor can pursue you. Under an ordinary guarantee, the guarantor generally has a defence allowing them, subject to certain conditions, to refuse payment until the creditor has attempted to recover the debt from the principal debtor. There are statutory exceptions.

A direct-payment guarantee (készfizető kezesség) offers no such protection requiring the creditor to pursue the company first. If the guaranteed debt is due and the company does not pay, the franchisor does not have to exhaust recovery proceedings against the company unsuccessfully before turning to you. This does not mean you must meet an unfounded claim, but it significantly changes when your exposure can arise.

The Hungarian terms garancia, kezesség and egyetemleges adóstárs—broadly, an independent guarantee, a suretyship and a jointly and severally liable co-debtor—are not interchangeable either. They can create different legal obligations, so do not settle for a verbal explanation that they are all merely standard forms of security.

Nor should you automatically assume that, as an individual, you qualify for the special protections available to consumer guarantors. Your connection to the business, such as your role as a director or your controlling ownership interest, may be significant. Ask a lawyer to clarify this separately.

3. Define which debts are covered

The key question is not simply whether you will give a guarantee, but which claims it covers and up to what limit. A guarantee covering “all present and future obligations arising from the franchise agreement” may be substantially broader than one securing a few months’ regular fees.

Draw up an itemised list of the claims covered:

• the initial franchise fee and ongoing franchise fees;
• payment for goods or services invoiced by the franchisor;
• late-payment interest and debt recovery costs;
• contractual penalties, damages or amounts payable on termination;
• debts relating to future outlets or separate agreements.

These are not necessarily all included in the guarantee: that is precisely what needs to be made clear. Also check who the creditor is. A guarantee given to the franchisor should not inadvertently extend to claims held by other companies.

One negotiating objective could be an overall, aggregate liability cap, which also specifies how interest, costs and other ancillary amounts are treated. Clarify whether the cap applies to all claims combined and whether the available cover is replenished after a payment. Even apparently limited security can create continuing exposure in this way.

4. Address the consequences of changes and termination

The duration of a guarantee is at least as important as its financial limit. Do not assume that ending the franchise agreement also releases you from guarantees covering earlier debts. Claims arising before termination may still emerge later.

Ask for a clear rule specifying the cut-off date for obligations covered by the guarantee and how the final account will be settled. Your lawyer should check that the deadline used actually produces the intended legal effect.

Consider separately what happens if the agreement is renewed, a new outlet opens or a new type of fee is introduced. One negotiating objective could be to require a separate written guarantee before the scope of cover can be extended. Avoid giving unlimited advance consent to future changes.

If you later sell your shareholding or step down as managing director, your guarantee will not necessarily end. Securing a release may also require the franchisor’s written consent in an appropriate form; an agreement between you and the new owner does not, by itself, necessarily release you from liability to the franchisor.

5. Ask for security proportionate to the risk

Ask which specific risk the personal guarantee is intended to cover. If the concern is the new business’s short trading history, you could propose security that is time-limited or reduces after a satisfactory payment record has been established. A cash security deposit or another form of security may be an alternative, but calculate the costs and the funds that would be tied up.

Ask to be notified directly of late payments and to have access to statements showing the claims covered by the guarantee. That way, you will not discover a problem only when a substantial sum is already being demanded from you.

Practical takeaway: before signing, summarise on a single page whom you could owe as guarantor, what you could owe for, how long your liability could last and the maximum amount payable. If the contract does not provide clear answers, seek clarification and an independent legal review first.