Buying a NZ Franchise: Understand Personal Guarantees

Buying a franchise through a limited company does not necessarily protect your personal assets. If you sign a personal guarantee, you may become personally responsible for obligations the company cannot meet. Before joining New Zealand’s franchise community, understand who wants a guarantee, what it covers and how you can eventually obtain a release.

1. Map every guarantee before committing

A personal guarantee is a promise to answer for another party’s obligations, usually those of your operating company. Depending on its wording, a creditor may be able to pursue you without first exhausting recovery against the company.

The franchise agreement is only one possible source. Your bank, landlord, equipment financier or trade account provider may also require guarantees. Several commitments can expose the same personal assets to different creditors.

Ask for every proposed document early, including schedules, finance terms and any separate guarantee or indemnity deed. Give your independent lawyer the complete package, rather than asking them to review only the franchise agreement.

Create a simple register showing:

• Who receives each guarantee and who must sign it.
• Which company’s obligations it covers.
• Whether liability has a financial limit.
• Whether interest, legal fees and enforcement costs sit outside that limit.
• When the guarantee ends and how release is documented.

If a spouse, partner or co-owner is asked to sign, establish why. They should obtain independent advice on their own exposure, particularly where their interests differ from yours.

2. Understand the legal protections — and their limits

New Zealand has no franchise-specific legislation, mandatory statutory franchise disclosure regime or franchise registration system. General law applies instead. Relevant legislation includes the Fair Trading Act 1986, which addresses misleading or deceptive conduct and unsubstantiated representations, and the Contract and Commercial Law Act 2017, which governs important aspects of contractual remedies. The Commerce Act 1986 governs competition matters.

The Companies Act 1993 provides the framework for New Zealand companies, but operating through a company does not cancel obligations you personally accept under a guarantee.

Membership of the Franchise Association of New Zealand (FANZ) is voluntary. Its Code of Practice and Ethics binds members and includes disclosure requirements. A member franchisor must provide its disclosure document at least 14 days before you sign a franchise agreement, or before you become bound by a preliminary agreement to proceed. The document must be updated at least annually.

These are association requirements, not universal statutory rights. Nor does receiving disclosure make a guarantee reasonable or affordable. Ask your lawyer to assess the actual wording and any available legal protections; do not assume an onerous clause can simply be ignored.

3. Test the wording against difficult scenarios

Ask your lawyer to explain the guarantee in plain English using situations you could realistically face: a slow opening, prolonged illness, a dispute between co-owners or closure of the business.

Pay particular attention to these terms:

Unlimited or “all obligations” cover. Exposure may extend beyond overdue royalties to other contractual liabilities. Establish exactly which debts, damages and costs are covered, including future obligations.

Guarantee and indemnity. These are not interchangeable. An indemnity may create a separate payment obligation and reduce the protection available under a guarantee alone. Have both provisions explained.

Joint and several liability. If several people sign, a creditor may be able to claim the full covered amount from one guarantor rather than dividing it equally. An agreement between co-owners does not necessarily restrict the creditor’s rights.

Continuing liability. Check whether the document covers renewals, extensions, amended agreements or increased borrowing. Do not assume your approval will be required each time.

Security over assets. A guarantee is not the same as a mortgage or other security. However, the documents may require both. Identify any home or other property being offered as security separately from your general personal exposure.

Your accountant should then assess the combined downside across all guarantees. There may be no reliable maximum where liability is uncapped; that uncertainty itself matters to your buying decision.

4. Negotiate boundaries and a clear release process

Possible requests include a financial cap, coverage limited to specified obligations, an expiry date, or a reduction after an agreed period of satisfactory payment. Ask whether material changes should require your written consent and whether another form of security would be acceptable.

The other party may refuse. Treat that response as information for your decision, not a reason to skip the assessment.

Also establish what happens if you cease being a director or shareholder. Those changes do not, by themselves, necessarily release a guarantee. Require a clear process for obtaining written release from each relevant creditor; one party’s release will not automatically release the others.

Practical takeaway: Before signing, have a complete guarantee register, a lawyer’s explanation of your exposure and an accountant’s downside assessment. Buy only when you understand both the business investment and the personal obligations behind it.