Buying a franchise: personal guarantees and risks to your assets

Joining a franchise network often requires more than an initial investment. A bank, landlord or franchisor may also require a personal guarantee from the company’s founder. This can extend your exposure beyond the money you have set aside for the business and put your personal assets at risk. Before signing, check not only the amount of finance involved, but also who is liable for the debt, to what extent and for how long.

1. Separate the company’s debt from your personal liability

If you buy a franchise through a limited liability company, a shareholder is generally not liable for the company’s obligations simply because they own it. This is the starting point under Slovenia’s Companies Act (ZGD-1), although there are exceptions. A shareholder can also assume personal liability for the company’s debt by signing a personal guarantee.

The position is different for a sole trader: they are liable for business obligations with all their assets. Choosing a business structure is therefore not just a tax or administrative matter.

A personal guarantee is not simply a formality when a deal is approved. It may mean that, if the debt is not paid, the creditor can demand payment directly from you, even though the company received the loan and signed the franchise agreement.

Before negotiations, draw up a list of all the security and guarantees required. Include the loan, premises lease, equipment instalment finance and obligations to the franchisor. For each, identify the debtor, creditor, guarantor and any assets offered as security. Several separate guarantees can create a combined exposure far greater than the initial investment.

2. Understand Slovenia’s rules on guarantees

Slovenia has no specific legislation comprehensively governing franchise agreements, nor a dedicated compulsory franchise register. There is also no specific statutory franchise disclosure document that must be provided before a contract is signed. This does not mean that entering into a contract is unregulated: the general rules of Slovenia’s Obligations Code (OZ) apply, including the principle of good faith and fair dealing and the rules on negotiations.

The provisions of the Obligations Code are particularly important for guarantees. A guarantee declaration must be in writing. A distinction must be made between an ordinary, secondary guarantee and the status of ‘guarantor and payer’ (porok in plačnik), under which the creditor can demand payment from the principal debtor, the guarantor or both at the same time.

Crucially, under the Obligations Code, a person guaranteeing an obligation arising from a commercial contract is liable as a guarantor and payer unless otherwise agreed. The absence of those words from the document therefore does not mean that the creditor must first exhaust its options for recovering the debt from the company.

The European Code of Ethics for Franchising is a self-regulatory framework for the franchise community, not Slovenian law. Referring to it does not replace a legal review of the guarantee declaration or provide a statutory limit on your liability.

3. Negotiate the scope, not just whether to sign

The question is not simply whether you will give a guarantee. What exactly it covers is just as important. A blanket declaration covering all present and future obligations may extend further than you expect when signing.

Propose clearly defined limits:

• An overall financial cap: specify whether the limit includes principal, interest, contractual penalties and recovery costs.
• Specific obligations: the guarantee should relate to a named agreement, rather than automatically covering all future dealings.
• A time frame: define which obligations are covered by reference to when they arise or fall due, and how the guarantee ends.
• Contract amendments: specify when fresh written consent from you is required to extend the guarantee.
• A gradual reduction: propose reducing the guaranteed amount once a specified portion of the loan has been repaid or agreed criteria have been met.

The agreement must be recorded in a document that binds the creditor. A promise from an intermediary or a verbal assurance that they ‘never call on guarantees’ does not limit a claim.

If several people sign guarantees, also check how liability is shared between them. Do not assume that each is liable only for an equal share of the debt.

4. Check enforceability and the consequences of payment

A guarantee, a mortgage and a directly enforceable notarial deed are not the same thing. A guarantee creates a personal obligation, a mortgage secures a claim against a property, and direct enforceability may allow the creditor, once the relevant conditions are met, to take enforcement action without first bringing court proceedings to obtain a judgment.

If the documents involve the family home or your partner’s signature, ask a lawyer to explain each signatory’s position and the extent of the risk. In particular, check whether the person is acting as a guarantor, co-debtor or someone providing an asset as security. These roles are not interchangeable.

A guarantor who pays the debt generally has the right to seek reimbursement from the principal debtor. In practice, however, that right may be worth little if the company has no assets. Do not treat it as a substitute for limiting the guarantee.

5. Agree the conditions for release before signing

Selling your shareholding, replacing a director or ending your involvement in the franchise network does not automatically discharge the guarantee. Agree in advance the conditions under which the creditor must release you and the written confirmation it will provide.

Give your lawyer the full set of documents, not just the franchise agreement. Ask for a review of your total personal exposure and an explanation of the consequences of late payment, changes to the financing and the business ceasing to trade.

Practical takeaway: before signing, you should be able to answer three questions: how much could you personally owe, when can the creditor demand payment, and how does the guarantee finally come to an end? If the answers are unclear, ask for the documents to be amended.