Buying a NZ Franchise: Understand Personal Guarantees

Buying through a limited company does not necessarily keep franchise obligations separate from your personal finances. A franchisor may ask you to guarantee your company’s performance, putting your own assets at risk if it cannot meet its obligations. Before joining a franchise community, understand exactly what you are being asked to promise, who can enforce it and when that exposure ends.

1. Identify every guarantee you must sign

A personal guarantee is a promise to answer for another party’s obligations. If your company is the franchisee, you may be asked to stand behind its debts or contractual performance. The protection normally associated with a limited company does not shield you from obligations you personally accept.

Do not look only for a separate document headed ‘Guarantee’. Guarantee provisions may appear within the franchise agreement, a schedule or a signature page. Related arrangements with a landlord, lender or equipment provider may create additional personal exposure.

Ask your solicitor to list each proposed guarantee, identifying:

• The person giving it and the business whose obligations it covers.
• The party entitled to enforce it.
• The debts or other obligations covered.
• Any financial cap, expiry date or release mechanism.
• Whether it also contains an indemnity.

An indemnity can create a separate obligation to compensate the other party for specified losses. Its effect depends on the wording, so do not assume it has the same limits or protections as the guarantee beside it.

2. Understand the legal framework in New Zealand

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or franchise registration requirement. Personal guarantees therefore need careful review under the general law rather than an assumption that special franchise protections will limit them.

The Contract and Commercial Law Act 2017 contains relevant rules on contracts and guarantees, including formal requirements for guarantees. The Fair Trading Act 1986 prohibits misleading or deceptive conduct in trade. These laws can be relevant to how an arrangement is presented and enforced, but neither gives buyers a universal right to walk away from an unfavourable guarantee.

Membership of the Franchise Association of New Zealand (FANZ) is voluntary. Member franchisors must comply with its applicable codes, including disclosure and advice-related requirements. Membership does not itself cap a guarantor’s liability or replace an independent review of the documents.

Have your solicitor explain your position as both a business owner and a proposed guarantor. If a spouse or another person is also asked to sign, they should receive advice on their own exposure and whether separate representation is appropriate.

3. Test the extent of your personal exposure

Ask what would happen if the company stopped trading while it still owed money. A guarantee may cover more than overdue royalties: its wording could extend to damages, interest, enforcement costs or other contractual liabilities.

Check particularly for these features:

Unlimited liability. Is there a stated maximum? If there is, does it include interest and legal costs, or can those amounts be added beyond the cap?

Joint and several liability. Where several people guarantee the obligations, this wording may allow the creditor to pursue one person for the whole covered amount. An agreement between co-owners to share responsibility does not necessarily restrict the creditor’s rights.

Continuing obligations. Does the guarantee cover renewals, variations or additional obligations? Ask whether changes can increase your exposure without a fresh signature.

Enforcement triggers. Do not assume the creditor must first exhaust the company’s assets. Have your solicitor explain when a demand can be made against you and what notice is required.

Use this review to discuss possible limits with the franchisor. A monetary cap, a narrower scope or a defined review point may be worth requesting, although the franchisor need not agree. Only rely on changes recorded in the executed documents.

4. Establish how you will obtain a release

Selling the business, transferring your shares or resigning as a director does not necessarily release a personal guarantee. Even when a replacement owner provides a new guarantee, yours may remain effective unless the relevant creditor releases you.

Before signing, ask what release process applies and whether any liabilities survive. Distinguish release from future obligations from responsibility for debts or breaches arising before the release date.

Keep a register of guarantees with signed copies, beneficiary details and release conditions. When ownership or finance arrangements change, revisit every entry rather than assuming one approval settles everything.

Practical takeaway: Before committing, obtain a written summary of what each guarantee covers, the potential exposure and the steps needed for release. If you cannot explain the personal risk in plain language, pause before signing.