Franchising in Portugal: negotiating payment guarantees

When turning an existing business into a franchise network, the franchisor needs to protect payments without demanding commitments that prospective franchisees do not understand or cannot afford. A guarantee is no substitute for a viable business: it provides recourse for specific obligations if the debtor defaults. Putting one in place requires identifying the risk, choosing the right instrument and explaining who may have to pay.

1. Identify what really needs a guarantee

Before asking the future franchisee’s shareholders for a personal guarantee, list the anticipated financial obligations. The initial franchise fee, royalties, supplies bought on credit and other services may involve different creditors, payment dates and risks.

If the initial franchise fee is paid in full before opening, the exposure is not the same as for supplies invoiced for later payment. Nor should a debt to an independent supplier automatically be treated as a debt to the franchisor.

Prepare a summary covering four points:

• Obligation covered: what the payment is for and who the creditor is.
• Expected exposure: how much could remain unpaid before action is taken.
• Duration of the risk: when it begins and ends.
• Alternative measures: advance payment, reduced credit or monitoring payment deadlines.

This analysis allows you to justify the guarantee by reference to actual exposure, rather than using it as a general test of trust. Avoid asking for unlimited cover simply because that wording appears in another contract.

2. Choose the instrument and clarify who is liable

A personal guarantee (fiança) is an undertaking by a third party, often a shareholder in the franchisee company, to the creditor to fulfil the guaranteed obligation. It is not simply confirmation that the guarantor is familiar with the contract. It may put the guarantor’s personal assets at risk.

A fiança is accessory to the principal obligation. The right to require prior enforcement against the debtor’s assets, known as the benefício da excussão prévia, may allow the guarantor to refuse payment until those assets have been pursued. However, exceptions apply, and this right may be excluded in accordance with the law. Expressions such as ‘principal payer’ (principal pagador) therefore require specific legal explanation before signing.

A bank guarantee is issued by a bank, which may charge fees and require counter-guarantees from its customer. How it operates depends on its wording: an independent, on-demand guarantee should not be confused with a fiança. The conditions for demanding payment and challenging a call on the guarantee differ.

Neither option is automatically better. Compare the protection provided with the cost, the assets put at risk and the effect on the new outlet’s cash flow. If the guarantee ties up funds needed for opening, it may worsen the very risk it was intended to reduce.

3. Place the guarantee within the Portuguese legal framework

Portugal has no specific franchising law. Franchise agreements are subject to the general contract rules in the Civil Code, including freedom of contract, good faith and pre-contractual liability. Personal guarantees are governed by specific provisions in the same Code, in Article 627 onwards.

Where terms are drafted in advance for use without individual negotiation, Decree-Law No. 446/85, on standard contractual terms, must also be considered. Communicating and explaining these terms should not be treated as a mere signing formality.

There is no specific Portuguese requirement to provide a franchise disclosure document known as a Circular de Oferta de Franquia with a statutory ten-day waiting period. This does not remove the duties to provide information arising from good faith, notably under Article 227 of the Civil Code. The prospective franchisee and any guarantor should know the scope of the proposed commitments in advance.

The European Code of Ethics for Franchising is a self-regulatory instrument, not national law. It is binding according to the terms of association membership or its incorporation into the contract, and promotes clarity in obligations and financial terms. It does not replace legal review of the guarantee.

4. Set limits, conditions for calling on the guarantee and release arrangements

Submit a specific proposal for legal review, rather than simply referring to a ‘guarantee of all obligations’. Identify the debts covered, the maximum amount, how interest and expenses will be treated, and the intended duration.

Also define how default is to be established, what notice will be sent and whether there is a period to remedy the default before the guarantee is called on. For a bank guarantee, confirm that these conditions are compatible with the document the bank actually issues.

Provide for what happens when the agreement is renewed, the financial terms change or the outlet is transferred. Do not assume that a guarantee automatically extends to every change. Also clarify when it will be released and how outstanding obligations will be handled, distinguishing between the end of the agreement and settlement of the debts covered.

Practical conclusion: before recruiting franchisees, prepare a risk summary and a proposal for a limited, understandable guarantee. Have both legally reviewed, and give the prospective franchisee and guarantor a genuine opportunity to obtain independent advice.