Security in a franchise agreement: deposit or guarantee?

When turning an established business into a franchise network, you need to decide not only how much to charge in fees, but also how to secure the amounts owed to you. A security deposit or guarantee can limit the impact of arrears, but poorly designed arrangements tie up a franchisee’s capital and create disputes. Start with the specific risk, rather than trying to include the longest possible list of security provisions in the agreement.

1. Identify which amounts need to be secured

First, list the potential sources of a franchisee’s debts to your business. Separate ongoing franchise fees from payments for goods, equipment provided and other obligations. Also check who the creditor actually is. If a franchisee buys products directly from an independent supplier, their debt does not automatically become an amount owed to the franchisor.

For each category, answer four questions:

• When does the obligation to pay arise, and when is payment due?
• How long could arrears build up before they are noticed?
• Which documents substantiate the amount owed?
• Is the same debt already covered by other security?

Use the payment history of your own outlet and the actual delivery cycle. Do not adopt a standard amount simply because another franchise network uses something similar. The security should reflect the potential financial exposure while leaving the franchisee with enough working capital.

Security is no substitute for assessing creditworthiness. Even a substantial deposit can quickly be exhausted if the franchisor fails to act on missed payments for too long. Someone must therefore take responsibility for the process: monitoring due dates and resolving discrepancies.

2. Choose an instrument suited to the risk and Polish law

Poland has no separate statute comprehensively regulating franchising, nor a specific statutory list of franchise security instruments. A franchise agreement remains an ‘unnamed contract’: one not regulated as a distinct contract type. Its terms are based on the principle of freedom of contract under Article 353¹ of the Polish Civil Code, subject to statutory law, the nature of the legal relationship and the principles of social coexistence. General rules on contractual obligations also apply, alongside competition law and other relevant regulations, depending on the provisions involved.

A cash security deposit involves transferring an agreed sum to secure specified claims. In a franchise relationship, the agreement must set out precisely how it works. It gives the franchisor access to funds but reduces the franchisee’s liquidity from the outset. It should not be presented as a non-refundable fee for joining the network.

A guarantee (suretyship) is governed by the Polish Civil Code. The guarantor undertakes to the creditor to fulfil an obligation if the debtor fails to do so. The guarantor’s declaration must be made in writing to be valid. Where the guarantee covers a future debt, the maximum amount of the guarantor’s liability must be specified in advance. Unless otherwise agreed, the guarantor is liable as a joint and several co-debtor, so you should not promise that the creditor will always exhaust enforcement options against the franchisee first.

A guarantee does not tie up the franchisee’s cash, but its value depends on the guarantor’s financial position. A signature alone is no substitute for assessing that position. Before choosing an instrument, ask a lawyer to check the scope of liability and the formal requirements for the documents.

3. Set out how the deposit will be used and returned

Simply stating that ‘the franchisee shall pay a security deposit’ does not create an effective process for managing it. The agreement should specify the amount, payment deadline, claims secured and conditions for drawing on the funds. It should also establish whether the deposit earns interest and on what terms, and whether it must be topped up after any partial use.

A practical procedure should include:

1. Identifying the specific amount due and the document supporting it.
2. Notifying the franchisee of the arrears and allowing the period specified in the agreement for payment or clarification of discrepancies.
3. Providing a statement showing the amount covered by the deposit and its remaining balance.
4. Setting out any requirement to top up the security.

Establish a separate procedure for disputed claims. Do not rely on a clause allowing the franchisor to retain any amount without explaining the basis and providing calculations.

Also specify the deadline for returning the unused balance of the deposit and how amounts identified after the relationship ends will be settled. Avoid retaining the entire sum indefinitely ‘just in case’. If some funds are to be held pending resolution of a specific outstanding matter, define the reason, the amount involved and the procedure for closing it out. Agree the accounting treatment and tax implications of receiving and subsequently using the deposit with an accountant.

4. Check the combined burden of security before recruiting franchisees

Assess the package as a whole, rather than each document in isolation. A deposit, a guarantee and additional security may cover the same obligations. Combining them requires justification; it should not result in the same debt being paid more than once.

Prepare a brief security summary for prospective franchisees, covering the creditor, amounts secured, sum or limit, duration, conditions for drawing on the security and terms for its release. Explain the difference between the maximum potential liability and the current outstanding debt. Where a guarantee is involved, also give the terms to the prospective guarantor before they sign their declaration.

Finally, run through a test scenario: a franchisee pays a fee late, disputes part of an invoice and then settles the arrears. Check whether the documents clearly explain what happens to the security at every stage.

Practical takeaway: first identify the risk and calculate the potential amount owed, then choose the security. Clear rules for using and returning it protect the franchisor’s finances while maintaining trust within the franchise network.