Buying a Franchise in Lebanon: Managing a Bank Guarantee in the Franchisor’s Favour

A franchisor may require a bank guarantee to secure fees or other obligations before you join its franchise network in Lebanon. This may seem like a straightforward financial requirement, but it can tie up cash needed to run your outlet and allow the franchisor to receive payment before a dispute with you has been resolved. So do not simply review the guarantee amount: examine its wording, its relationship with the franchise agreement, the conditions for demanding payment from the bank and how your liability ends.

1. Understand the instrument before agreeing to it

Ask for a copy of the proposed guarantee wording, not just a clause requiring you to provide a ‘bank guarantee acceptable to the franchisor’. That phrase leaves key points to be negotiated after you have committed to the franchise, when you have less scope to refuse. Identify the issuing bank, the beneficiary’s legal name, the currency, the maximum amount, the expiry date and the documents required to make a claim.

The key distinction is between a guarantee requiring specified evidence to support a claim and an independent guarantee payable on demand in accordance with its terms. In the latter case, the bank may check whether the demand complies with the wording rather than resolve the operational dispute between you and the franchisor. Do not assume that disputing an invoice automatically stops payment, or that a period allowed to remedy a breach under the franchise agreement binds the bank unless it is reflected in the guarantee documents.

Ask both your lawyer and the bank:

• Is the guarantee independent of the franchise agreement, and what does that mean if a dispute arises?
• Is a written demand sufficient, or must it include a statement of the amount and why it is due?
• Are partial or repeated claims permitted, and what is the overall limit?
• Does the wording incorporate any banking rules, and do you understand their effect?

Do not rely on the instrument’s name alone: the risks depend on its actual wording and conditions.

2. Calculate the impact on your outlet’s cash flow

The bank’s commission is not the only cost. It may require cash collateral, other security or an allocation of part of your credit facility. Obtain a written quotation setting out the requirements, the fees for issuing, amending and extending the guarantee, and what happens if the bank pays the beneficiary and seeks reimbursement from you.

Include these items in your franchise purchase budget separately from the initial franchise fee and fit-out costs. Money held as collateral for the guarantee is not an available reserve for wages or stock purchases. If the guarantee uses part of your credit limit, do not count that portion again as funding available to run the business.

Test at least two scenarios: the guarantee remaining in place for its full term without a claim, and a payment being made under it while the outlet’s sales are weak. Consider how you would reimburse the bank and whether the collateral and the guarantee are denominated in the same currency. Do not assume that any existing account balance can be used as acceptable collateral; obtain written confirmation from the bank about the funds required, the conditions governing their use and when they will become available again.

With the franchisor’s agreement, also compare the guarantee with contractual alternatives, such as splitting fees into instalments according to when they fall due. Compare overall cost, cash flow and protection, not just commission.

3. Link the cover to specific, measurable obligations

Negotiate a clear list of the obligations secured by the guarantee. Does it cover only royalties due, or marketing fees as well? Does it include compensation claimed by the franchisor that has not yet been determined? Avoid open-ended wording such as ‘all present and future obligations’ without understanding its scope and financial implications.

Ask for a cap proportionate to the obligations covered and a mechanism for reducing it as risks fall or specified amounts are paid. If part of the guarantee is drawn down, establish whether it must be replenished, within what period and up to what maximum amount. An uncontrolled replenishment obligation can turn an apparent cap into repeated pressure on your cash resources.

Discuss including advance notice, a detailed statement of the claim and, where appropriate, a period to remedy non-payment. Then check whether the relevant requirements can be incorporated into guarantee wording acceptable to the bank: a contractual promise alone does not necessarily change the bank’s payment process.

Also address how payments made under the guarantee will be credited towards settlement of the same debt, and how any amounts shown not to have been due will be refunded. Specify the guarantee’s expiry, the conditions for extending it and the procedures for releasing the collateral. Do not leave the release of your funds dependent indefinitely on the franchisor’s consent, or assume that ending the franchise agreement automatically cancels the guarantee.

4. Review the agreement and guarantee under Lebanese law

Lebanon has no comprehensive franchise-specific law, dedicated national franchise registration system or statutory requirement for a franchise-specific disclosure document. The relationship is governed primarily by the Code of Obligations and Contracts, the Code of Commerce and other relevant general rules. The bank’s undertaking requires a separate review based on its wording and the legal and banking rules that apply to it.

Within its scope of application, the Lebanese Franchise Association’s Code of Ethics includes a commitment to provide complete, accurate and material written information a reasonable time before a prospective franchisee commits. However, it is not a generally applicable disclosure law and does not automatically protect you against a demand that complies with the guarantee’s terms.

Instruct a Lebanese lawyer to cross-check three documents: the franchise agreement, the guarantee wording and your agreement with the bank. Ask them to identify the governing law, jurisdiction and procedures for challenging claims under each, as well as any conflicts between them. Do not rely on the possibility of obtaining a court order to stop payment as a substitute for sound drafting at the outset.

The practical takeaway: Before providing the guarantee, establish what it covers, when a claim can be made, its impact on your cash resources and how it ends. Do not sign until the franchise agreement and the bank guarantee wording are aligned on the protections you have negotiated.