Buying a franchise: limit your personal liability

Buying a franchise is a business decision that can affect your personal assets. As a franchisee, you remain an independent business owner: an established brand does not take over your debts. Your personal exposure depends not only on your legal structure, but also on any documents you sign separately. Before buying, therefore, establish which creditors could pursue you personally.

1. Start with the legal structure, not the brand name

With a sole proprietorship (eenmanszaak), there is no separation between your business and personal assets. Debts arising from the franchise agreement, finance arrangements or premises lease can therefore affect your personal finances. Consider not only overdue fees, but also obligations that continue after the outlet closes.

In a Dutch general partnership (vennootschap onder firma, or vof), partners are generally jointly and severally liable for the partnership’s debts. A creditor can therefore pursue a single partner for the full amount. An internal agreement that your business partner will bear half the debt does not automatically restrict that creditor’s rights.

A Dutch private limited company (besloten vennootschap, or bv) is a separate legal entity. In principle, the company itself is liable for its debts. This offers a different starting point, but not unlimited protection. A personal guarantee or liability as a director, among other things, can still leave you personally liable.

Ask your accountant and legal adviser to assess together which legal structure suits the investment, financing and your personal circumstances. Looking solely at tax advantages is not enough. Compare formation costs, administration costs and liability risks as well.

2. Look for personal obligations in every document

A franchisor may be willing to contract with your bv while also requiring you to provide security personally. A bank, landlord or leasing company may make the same request. You therefore need to assess the protection offered by a bv against the full set of documents.

Before signing, ask for drafts of the franchise agreement, finance agreements, premises lease, equipment or vehicle leases, and any separate security documents. Look out for terms including:

• Suretyship (borgtocht): you undertake to a creditor to answer for another party’s obligation, such as that of your bv.
• Joint and several liability: you become personally liable alongside the business for the debt concerned.
• Personal guarantee: this label can cover different obligations; its meaning depends on the precise wording.
• Security over personal assets: for example, a mortgage over your home to secure a business loan.

Check the signature page too. Are you signing solely on behalf of the bv, or also ‘in your personal capacity’? A second signature can create a substantially different obligation.

Then prepare a summary for each document: who is the debtor, who provides security, which obligations are covered and up to what amount? Include interest, debt recovery costs and any future debts. A stated maximum is only clear once you know which items fall within it.

3. Use the franchise rules, but understand their limits

The Netherlands has specific legislation: the Dutch Franchise Act (Wet franchise), incorporated into Articles 7:911 to 7:922 of the Dutch Civil Code (Burgerlijk Wetboek, or BW). Among other things, Article 7:913 BW requires the franchisor to provide the draft agreement, its annexes and information about financial obligations in advance. Any requirement for personal security therefore deserves explicit attention in your pre-signing review.

Under Article 7:914 BW, the information required by law must be provided at least four weeks before the franchise agreement is concluded. Use that period to have both the business’s financial viability and your personal exposure assessed.

The Dutch Franchise Act does not impose a general ban on personal guarantees. Its protections therefore do not automatically invalidate personal security. Suretyships are also subject to the general rules in Book 7 of the Dutch Civil Code. Whether special protections for a private individual acting as surety apply depends on your specific position and circumstances.

Are you married or in a registered partnership? Under Article 1:88 BW, your spouse’s or registered partner’s consent may be required for certain security arrangements. There are exceptions. Have this checked specifically; do not assume either that you are automatically protected or that the arrangement is automatically valid.

4. Negotiate both the scope and the release terms

First ask why personal security is needed and what specific risk it is intended to cover. Then negotiate limits proportionate to that risk, rather than simply providing security for all current and future obligations.

For example, discuss:

• a clear maximum amount, specifying how interest and costs are treated;
• restriction to a single, specified agreement;
• an expiry date or a reduction as the debt is repaid;
• exclusion of new obligations without your written consent;
• written release from the security arrangement once the relevant debt has been settled.

Ask your accountant to model an adverse scenario too. What personal assets would you have left if the outlet closed while the loan, premises lease and personal security obligations remained in place? Assess the combined obligations, rather than each guarantee in isolation.

Practical takeaway: only sign once you have a single overview showing who can pursue you personally, for what, up to what amount and when the obligation ends. A suitable legal structure helps, but the signatures on your contracts also determine how much protection remains.