Personal guarantees for your first franchise: securing payments

When expanding an existing business into a franchise network, you may allow a franchisee to defer payment of initial costs or provide ongoing support for a fee. This exposes you to the risk of non-payment. A personal guarantee from the owner of the franchisee company is one possible form of security, but it is no substitute for reviewing the business plan. Before entering into your first agreement, decide what you want to secure and what commitment it is reasonable to ask of the person behind the business.

1. Start by defining your actual exposure

Do not include a guarantee in the agreement simply because it appears in a template from another country. First, list the obligations where non-payment would genuinely affect you. Distinguish between the initial fee, ongoing franchise fees, goods supplied and separately commissioned services.

For each item, record:

• who the creditor and debtor are;
• when the obligation arises and when payment falls due;
• how long the debt could accumulate before you identify it;
• whether any other security is already in place;
• how you will substantiate the amount and basis of the claim.

If goods are supplied by an independent supplier, the supplier’s claim is not automatically yours. Equally, a guarantee covering franchise fees does not necessarily secure all other payments. Its scope must be clearly defined.

Consider less onerous options too: advance payment for individual services, shorter payment terms or a limit on deferred payments. Security should reflect the risk, not a desire to impose the widest possible personal liability on the prospective franchisee.

2. Distinguish signing for the company from giving a personal guarantee

Slovenia has no dedicated franchising law, compulsory franchise register or specific statutory franchise disclosure document. A franchise agreement is an innominate contract—one not specifically defined as a contract type by law—and is governed by the general rules of the Slovenian Obligations Code (OZ). The OZ also specifically regulates guarantees and provides that a guarantee agreement binds the guarantor only if they give their guarantee undertaking in writing.

The Slovenian Companies Act (ZGD-1) is relevant to the legal position of companies, sole traders and representatives. A director’s signature on an agreement on behalf of a company does not, in itself, constitute a personal guarantee. If you require personal security, it must be unambiguous that the same person is also taking on the separate role of guarantor.

Bear in mind that a sole trader is already liable for business obligations with all their assets. An additional ‘personal guarantee’ from that same individual therefore does not create a separate person guaranteeing the debt.

A lawyer should also check how the guarantee can be enforced. The OZ distinguishes between a guarantee under which performance can generally be demanded from the guarantor only after the debtor has failed to comply with a written demand, and a guarantee under which the guarantor is liable as a ‘guarantor and payer’, meaning jointly and severally liable with the debtor. For guarantees covering obligations under commercial contracts, the default rule is that the guarantor is liable as a guarantor and payer unless otherwise agreed. Explain these distinctions to the prospective franchisee before signing, not only once a payment is overdue.

3. Set the amount, obligations and time limits

Avoid a vague requirement that the owner guarantee ‘everything, at any time and without limit’. Even where you want broader security, you need to understand its scope and consequences. A guarantee is linked to the underlying obligation, so an unclear franchise agreement will also make the guarantee harder to apply.

The draft should answer at least the following questions:

• Does the guarantee cover only specified fees, or other claims as well?
• Is there an overall cap on liability?
• How are interest and recovery costs treated within that cap?
• Does it cover future obligations, and how are they defined?
• What happens if the franchise agreement is renewed or amended?

Distinguish the period in which the secured obligations arise from the deadline for demanding that they be fulfilled. A statement that the guarantee ‘remains valid until the agreement ends’ can raise questions about debts incurred earlier but still unpaid. A lawyer should therefore draft the wording to reflect the intended business arrangements.

Also establish conditions for reducing or releasing the security. This could be agreed after a period of reliable payment or when suitable alternative security is put in place. Any release should be confirmed in writing, not merely promised verbally.

4. Organise signing, record-keeping and notifications

Give the prospective franchisee the guarantee wording early enough for an independent legal review. The absence of a specific franchise disclosure form does not remove the importance of good faith and fair dealing during negotiations. Do not present personal liability as an insignificant formality.

At signing, check the guarantor’s identity, the principal debtor’s details and the link to the specific agreement. If the same person signs as both director and guarantor, distinguish the two roles and provide clearly separate signature blocks. Each signatory should receive the complete signed documentation.

Then appoint someone to monitor outstanding amounts. Records should show due dates, payments received, disputes raised and notices sent. Follow any contractually agreed requirements for notifying the guarantor consistently; do not wait until the debt becomes difficult to manage.

Whenever there is a significant change to the business relationship, check whether the guarantee also needs to be updated. Do not assume that the existing wording automatically covers the new arrangements.

Practical takeaway: before requesting a personal guarantee, prepare an overview of your exposure, set a proportionate scope of security and obtain a separate, clear written undertaking. A good guarantee is an understandable agreement, not a substitute for a sustainable business relationship.