Buying a Franchise: Limit Personal Guarantee Risks in Your Contract

Buying a franchise through a limited liability company does not always mean your personal assets are fully protected from the risks of the transaction. Prospective franchisees may be asked to sign a personal guarantee covering the company’s obligations. This should be assessed as a separate commitment, not treated as routine paperwork. Before paying or signing any documents, understand who is providing the guarantee, which obligations it covers and when that liability ends.

1. Recognise when you are acting as a guarantor

A personal guarantee is an individual’s promise to fulfil another party’s obligations if that party fails to do so, subject to the guarantee’s terms. When buying a franchise, your company may be the franchisee, while you, as a shareholder or director, may be asked to act as a personal guarantor.

Signing as a director is different from signing as a guarantor. In the first role, you act on behalf of the company within your authority. In the second, you take on obligations in your own name. A single set of documents may involve both.

Look beyond headings such as “personal guarantee” for wording such as “suretyship”, “joint and several liability”, “guaranteeing all obligations” or “personally liable”. Check signature pages, appendices, financing forms and separate declarations.

Create a simple checklist recording:

• The name of the debtor: the party with the primary obligation.
• The name of the creditor or beneficiary of the guarantee.
• The name of each guarantor and the capacity in which they sign.
• The documents containing the guarantee undertaking.
• The types of obligations for which the guarantor can be required to pay.

Do not treat all forms of security as interchangeable. A personal guarantee differs from pledging a specific asset as collateral. If both are required, each needs a separate review.

2. Understand the applicable legal framework

Indonesia has specific franchise rules under Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. These rules cover the franchise offering prospectus, franchise agreement, the parties’ rights and obligations, and the Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba).

However, compliance with franchise regulations does not, in itself, limit the risks of a personal guarantee. The general legal basis for guarantees is Article 1820 and subsequent provisions of the Indonesian Civil Code. Article 1820 defines a guarantee as an agreement by a third party to fulfil a debtor’s obligation if the debtor fails to do so.

Another important provision is the guarantor’s right under Article 1831, which in principle allows the guarantor to require the debtor’s assets to be seized and sold first to settle the debt. Article 1832 sets out circumstances in which this right cannot be exercised, including where the guarantor has waived it or agreed to be jointly and severally liable with the debtor.

A waiver clause is therefore not a minor formality. Ask a legal adviser to explain how it affects the order in which payment can be pursued and your legal position. Do not assume the creditor must always exhaust its recovery efforts against the company before pursuing the guarantor.

3. Negotiate limits on amount, scope and duration

The greatest risks often arise from overly broad wording, such as a guarantee covering “all present and future obligations”. This wording needs to be unpacked: does it include contractual payments, interest, penalties, damages and recovery costs?

Propose concrete limits rather than simply asking for a “reasonable” guarantee. Prioritise the following four points.

An overall financial cap. Propose a liability ceiling that includes every component of a claim. A cap covering only the principal obligation can leave substantial additional exposure if interest and costs fall outside it.

Specifically defined obligations. Identify the agreements and types of obligations covered. Avoid automatic extensions to other transactions, affiliated companies or additional outlets you have not assessed.

Consent to changes. Propose that any increase in the amount or expansion of the obligations covered should require the guarantor’s written consent. Check whether the documents instead give advance consent to every contractual amendment.

An end date and release. Distinguish between the guarantee’s expiry date and the treatment of obligations that have already arisen. Request a procedure for obtaining a written release once the guaranteed obligations have been fulfilled.

If there are several guarantors, do not assume liability is automatically divided equally. Check whether each can be pursued for the full amount. An internal arrangement between guarantors does not necessarily limit the creditor’s rights.

4. Assess the impact before deciding

Work through a scenario in which the company cannot meet its obligations. Calculate your maximum exposure from the contract wording, not just the outstanding payments visible today. If the limit cannot be calculated, request a written explanation and revised wording before proceeding.

Also ask what happens if you cease to be a director, sell your shares or the company changes ownership. Do not assume a change in role or ownership automatically releases a guarantor. Make sure the mechanism for replacing or releasing the guarantor is clearly stated.

If you are asked to involve your spouse or jointly owned assets, seek a specific review of the status of matrimonial property and the form of consent required. Do not sign declarations about assets unless you understand them.

Keep the final versions of all documents, together with approvals for any amendments. A verbal promise that the guarantee “will never be used” is no substitute for written limits.

Practical step: before buying, make sure you can answer three questions: what is your maximum personal liability, which obligations are guaranteed, and how can you obtain a release? If the answers remain unclear, postpone signing the guarantee and seek an independent legal review.