Buying a Franchise: Limit Your Personal Guarantee

When joining a franchise network, your company may sign the agreement, but the franchisor may also require a personal guarantee from you. This creates an additional liability that is not limited to the money you have invested in the business. Before agreeing to provide this security, establish which debts it covers, when the creditor can demand payment from you and how you can later secure your release.

1. Distinguish between signing for the company and giving a personal undertaking

Signing as a director on behalf of a company is not the same as signing as a personal guarantor. The contractual documents may place both roles side by side, and a personal undertaking may also appear in an appendix or a separate declaration. Check the entire set of documents, not just the page stating the initial fee.

Pay particular attention to terms such as guarantor (porok), guarantor and payer (porok in plačnik), joint and several guarantee (solidarno poroštvo), accession to debt (pristop k dolgu) and other forms of personal security. These terms do not necessarily have the same legal consequences. If the documents also include a declaration relating to a bill of exchange or consent to direct enforcement, ask your adviser to explain the effect of those provisions separately.

For each form of security required, record:

• who the principal debtor is and who is personally liable;
• who can demand payment;
• which agreement or obligation is secured;
• whether you are signing as the company's representative or in your own name;
• what additional security is required.

The franchisor, bank, landlord and suppliers may each require separate guarantees. Consider them together: each individual guarantee may seem acceptable, but their combined effect can substantially increase the risk to your private assets.

2. Understand the rules that apply in Slovenia

Slovenia has no dedicated franchise legislation, compulsory franchise register or specifically prescribed pre-contractual disclosure document. Franchise agreements are governed by the general rules of the Slovenian Obligations Code (Obligacijski zakonik, OZ). This also regulates guarantees, including their form and the extent of a guarantor's liability.

A guarantee agreement binds the guarantor only if the guarantee undertaking is given in writing. However, the fact that it is in writing does not mean that the undertaking is favourable to you or limited in scope. What matters is the wording of the undertaking and how it interacts with the other contractual provisions.

It is also important to understand when a creditor can pursue the guarantor. Where you act as a guarantor and payer (porok in plačnik), the creditor can demand performance from the principal debtor, the guarantor or both at the same time. Under the OZ, this is generally the default position for a guarantee securing an obligation under a commercial contract, unless otherwise agreed. Do not assume that the franchisor must first exhaust all recovery options against your company.

Company law is set out in the Slovenian Companies Act (Zakon o gospodarskih družbah, ZGD-1). If you operate through a d.o.o., a Slovenian limited liability company, your limited liability as a shareholder does not in itself cancel a personal guarantee you have separately given. The guarantee creates a separate legal basis for your liability. Before signing, ask a lawyer to explain the defences available to you as a guarantor and any provisions that could weaken your position.

3. Negotiate the amount and precise scope

The greatest risk is a broad undertaking covering all present and future obligations without a clear upper limit. Such wording can cover much more than unpaid monthly franchise fees.

Ask for a breakdown showing whether the guarantee covers the initial fee, ongoing payments, goods supplied, interest, recovery costs and any liability for damages. In particular, check whether it extends to new outlets, additional agreements or subsequent changes to the price list.

Propose a clearly defined cap on your total liability. The wording should specify whether that cap includes interest and costs. A limit on the principal debt alone is not the same as a limit on everything you might have to pay.

Other possible negotiating options include:

• limiting the guarantee to precisely specified obligations;
• excluding new outlets and agreements unless you give fresh written consent;
• progressively reducing the guaranteed amount against agreed criteria;
• replacing the personal guarantee with another, limited form of security.

These are proposals for negotiation, not specific statutory rights available to franchisees. Compare the costs of alternative forms of security too: a bank guarantee or cash deposit may reduce one risk but incur charges or tie up funds.

4. Specify when and how you will be released

The date on which the franchise agreement ends is not necessarily the date on which all obligations under the guarantee end. Unpaid debts or later adjustments relating to the trading period may remain outstanding. Stepping down as a director does not, in itself, release you from a personal guarantee either.

The document should therefore distinguish between the period during which secured obligations can arise and the rules for making claims. Agree a procedure for preparing a final account, checking outstanding items and providing written confirmation of your release. If there are several creditors, you will need suitable arrangements with each of them separately.

Before signing, work through an adverse scenario: the company stops generating revenue while outstanding bills all fall due at once. Assess your exposure under all personal guarantees and other personal security arrangements with your accountant, and ask a lawyer to check that the contractual wording genuinely reflects the limits you have agreed.

Practical takeaway: do not treat signing a personal guarantee as a formality. Before signing, establish the maximum extent of your liability, the obligations covered and a clear, verifiable process for securing your release.