Buying a Franchise: Check Personal Guarantees Before Taking Out Finance

Buying a franchise through a company does not always separate business risk from your personal finances. Where finance requires a personal guarantee, an owner may become liable if the company fails to pay. Prospective franchisees need to assess not only whether an outlet can meet its repayments, but also who ultimately bears responsibility for its debts. These checks are best carried out before agreeing finance for a franchise purchase.

1. Identify the borrower and the guarantor

Start by distinguishing three roles: franchisee, borrower and guarantor. These may be different parties. For example, an Indonesian limited liability company (PT) might sign the franchise agreement and take out the loan, while a shareholder is asked to guarantee repayment of the company’s debt.

A personal guarantee is not merely an owner’s administrative approval. It can create a separate obligation for the person signing it. Do not assume that signing as a director is the same as signing as a personal guarantor. Check the capacity stated on each signature page.

Ask for all documents relating to the finance, including:

• The offer letter and loan agreement.
• The personal guarantee deed or agreement.
• Any documents creating security over assets.
• The lender’s general terms and any amendments referred to.
• Spousal consent documents, if required.

If you finance the franchise purchase with a loan in your own name, you are the borrower, not simply a guarantor for the company. Assess the risk as personal debt. Equally, do not automatically assume that spousal consent amounts to a guarantee: read the document to understand its purpose and legal effect.

2. Understand franchise rules and guarantee rules separately

Government Regulation No. 35 of 2024 on Franchising provides the specific regulatory framework for franchising in Indonesia, replacing Government Regulation No. 42 of 2007. It requires franchisors to provide prospective franchisees with a Franchise Offering Prospectus at least 14 calendar days before the franchise agreement is signed.

However, this disclosure requirement does not replace a review of the loan documents. Nor does a franchisor’s approval of a prospective franchisee guarantee that the finance is safe or that the brand owner will take responsibility for the debt.

Debt guarantees are governed by the Indonesian Civil Code. Article 1820 broadly defines a guarantee as an agreement under which a third party undertakes to the creditor to fulfil the borrower’s obligation if the borrower fails to do so.

Article 1831 generally gives a guarantor the right to require the borrower’s assets to be seized and sold first to repay the debt. However, Article 1832 sets out exceptions, including where the guarantor waives that right or accepts joint and several liability with the borrower.

Clauses concerning a waiver of the guarantor’s rights or joint and several liability therefore deserve particular attention. Ask a legal adviser to explain whether the creditor can pursue you for payment without first seeking to sell the company’s assets. Do not rely on verbal assurances that the guarantee is “just a formality”.

3. Negotiate measurable limits on liability

Do not stop at asking, “How much is the loan?” The guarantee may cover interest, penalties, recovery costs or other obligations defined in the documents. A limit on the loan principal is not necessarily a limit on the guarantor’s total liability.

Put these four questions to the lender:

1. Which debts are guaranteed? Propose that the guarantee cover a specific facility, rather than all the company’s current and future debts.
2. What is the overall limit? Ask whether the cap includes principal, interest, penalties and other costs, or only some of these components.
3. What happens if the facility changes? Propose that any increase in the credit limit, new facility or material change require the guarantor’s written consent.
4. When does the guarantee end? Distinguish between the end of the loan drawdown period and full repayment of all guaranteed obligations.

These are negotiating proposals, not automatic rights that the creditor must accept. If the lender will not agree to limits, factor that exposure into your decision to buy the franchise.

Also model scenarios in which opening is delayed, sales weaken or the outlet has to close temporarily. Calculate your ability to repay using business cash flow and personal funds that are genuinely available. Do not treat the family home or savings as a fallback without discussing the consequences with those affected.

4. Make sure there is a route out of the guarantee

Selling shares in the company, changing directors or transferring the outlet does not automatically release a personal guarantee. An agreement between the old and new owners may not bind the creditor either. Release conditions should therefore be discussed at the outset of the financing arrangement.

Ask whether the creditor will release the guarantee following repayment, the appointment of an approved replacement guarantor or fulfilment of other conditions set out in writing. Establish who has authority to approve the release and which document will confirm it.

Keep copies of signed documents, facility amendments, payment records and release letters. Once the debt has been repaid, request written confirmation of full repayment and the end of the guarantee in accordance with the agreement. If assets have been pledged as security, also check the process for releasing that security: this is separate from ending the personal guarantee.

Practical step: before borrowing to buy a franchise, prepare a one-page summary identifying the borrower, guarantor, guaranteed debts, liability limits and release conditions. Do not sign while any of these points still depends on a verbal promise.