Buying a Franchise in India: Check the Limits of Your Personal Guarantee

Even where a franchise agreement is in a company’s name, the owner may be asked to provide a separate personal guarantee. This can make you personally liable for some of the business’s obligations. As you enter the franchise sector, do not treat this as a mere formality. Before choosing a brand, establish who the guarantee is being given to, which payments it covers and when it will end.

1. Understand the difference between a guarantor and an authorised signatory

Signing an agreement on behalf of a company and becoming a personal guarantor are different roles. In the first, you represent the business entity; in the second, you may accept personal liability if it fails to meet its obligations. Both roles may appear in the same document, so reading only the final signature page is not enough.

Ask for the full draft, all attachments and any separate guarantee document. Check whether you are described as a director, owner, guarantor or co-debtor. Do not assume that a co-debtor’s liability is equivalent to a guarantee: its legal effect may differ.

Get written answers to these questions:

• Is the guarantee in favour of the franchisor alone, or its affiliated companies as well?
• Does it also cover payments under supply, equipment hire and other agreements?
• Will a guarantee for one outlet extend to future outlets?
• Is a family member also being asked to provide a guarantee, and why?

A personal guarantee does not automatically create a charge over a specific asset. However, enforcing personal liability may still affect your assets. If there is a separate mortgage or security document, have it reviewed independently.

2. Which law governs guarantees in India?

India has no dedicated national franchise law, central franchise register or mandatory franchise-specific pre-sale disclosure regime. Do not therefore assume that the brand must provide a government-prescribed summary of the guarantee or that you will have a mandatory cooling-off period.

The Indian Contract Act, 1872 provides the main legal framework for contracts and guarantees. Section 126 defines the concepts of a guarantee, surety, principal debtor and creditor. Under Section 128, unless the contract provides otherwise, the guarantor’s liability is co-extensive with that of the principal debtor.

In practical terms, do not assume that a demand can be made against you only after every avenue for recovering payment from the company has been exhausted. Depending on the wording of the guarantee and the applicable law, the creditor may take action against the guarantor.

General rules on free consent, fraud and misrepresentation are also relevant. Any relief available on these grounds will depend on the facts and legal requirements. Even where company or limited liability partnership laws apply to the business, a separate personal guarantee can create personal liability.

3. Put the maximum amount and end conditions in writing

Wording such as “all present and future liabilities” can make a guarantee broader than you expect. Do not assess your exposure solely by reference to the initial franchise fee. Check whether outstanding fees, interest, damages and recovery costs are also covered.

During negotiations, propose a clear overall cap. Specify whether interest and legal costs fall within that cap or are payable in addition to it. A liability cap is not an automatic franchisee right: it must be agreed and included in the document.

When considering duration, distinguish between three points: how long new obligations will fall within the guarantee, when liability for existing debts will end, and how you will obtain written confirmation of release. It is risky to assume that ending the franchise agreement also ends all liability under an existing guarantee.

Also ask what happens to the guarantee if the agreement is renewed, fees increase, another outlet is added or the underlying agreement changes. In some circumstances, changes to the underlying agreement may affect the guarantor’s liability. Have a lawyer review the draft, including any clauses giving advance consent to changes. Resigning as a director or selling your shareholding does not automatically release you from the guarantee either.

4. Test your personal exposure before signing

Consider a hypothetical situation: the outlet closes and the company does not have enough money to pay all undisputed amounts due. Using the documents, write down who could demand payment from you, how much they could demand and under what conditions. Unclear answers are a sign that the draft needs revising.

Assess a personal guarantee given to a bank separately from one given to the franchisor. A cap on one does not mean the other is capped. Evaluate your combined exposure in light of your personal savings and family needs.

A verbal assurance that “we never enforce guarantees” does not cancel a written obligation. Check the cap, duration and release procedure in the final version, and keep a signed copy.

Practical takeaway: Only accept a personal guarantee once you understand its amount, scope and end conditions. Take independent legal advice to help limit your exposure: operating through a company does not provide complete protection from personal liability.