Buying a franchise: review personal guarantees before arranging finance

Buying a franchise means joining a network, but the financial risk may still fall on you personally. A bank, landlord or franchisor may require a personal guarantee even if you operate through a Swedish limited company (aktiebolag). Before agreeing, you need to understand which debts you are guaranteeing, how much you could be liable for and what it takes to be released from the commitment.

1. Identify every requirement for personal security

A limited company normally means that shareholders are not personally liable for the company’s debts. A personal guarantee, however, is a separate commitment: you promise to answer for someone else’s debt under the terms of the guarantee. The limited company therefore does not protect you against liability you have expressly accepted.

Start by gathering the finance agreements, franchise agreement, tenancy agreement, equipment leases and any supplier credit terms. Check schedules and separate security documents too. A guarantee requirement may sit outside the document describing the underlying transaction.

Draw up a summary with one entry for each commitment:

• Who can demand payment from you?
• Which company’s debts are covered?
• Which agreement and payments does the security cover?
• Is there a maximum amount and a clear end date?
• Have you also pledged personal assets as security?

Distinguish between a guarantee and a pledge of assets. A guarantee is a commitment to pay, whereas a pledge gives the creditor the right to enforce its security against a specific asset under the agreed terms. If both are involved, you need to understand how they interact. Do not assume that one form of security automatically replaces another.

2. Read the scope, not just the financial limit

The wording “as if it were your own debt” (såsom för egen skuld) usually indicates a Swedish form of guarantee known as proprieborgen. This normally allows the creditor to demand payment from the guarantor once the debt falls due, without first exhausting the options for recovering payment from the company. By contrast, under a simple guarantee (enkel borgen), it normally has to be established first that the debtor cannot pay.

Check in particular whether the guarantee covers a specific credit facility or all the company’s current and future obligations to the other party. The latter can be considerably harder to assess. Ask an independent lawyer to explain the scope before you sign.

Any stated financial limit also needs scrutiny. Does the cap include interest, default interest and debt recovery costs, or are these added on top? Can the credit limit be increased or the agreement amended without your further consent? What happens to your liability as the company repays the debt?

If there are several co-owners, check whether liability is joint and several. This may allow the creditor to demand the full amount covered by the guarantee from a single guarantor. An internal agreement to share the risk does not normally bind the creditor. Moreover, the right to recover a contribution from a fellow guarantor afterwards is only valuable if that person can pay.

3. Understand the protections under Swedish law

Sweden has a specific Act on Franchisors’ Duty to Disclose Information (2006:484), but no comprehensive franchise law governing every aspect of the relationship. Well before the agreement is entered into, the franchisor must provide clear, understandable written information covering, among other things, fees and other financial terms.

If the franchisor requires a personal guarantee, ask for both the requirement and its financial implications to be clearly set out in the documentation. However, the disclosure legislation neither imposes a general ban on personal guarantees nor sets an overall financial cap on your liability. Nor does it replace a review of the bank’s or landlord’s separate terms.

Guarantees are assessed under, among other provisions, the guarantee rules in the Swedish Commercial Code and general contract law. The Swedish Contracts Act allows unfair terms to be adjusted, but the assessment depends on the circumstances. Do not assume that a signed commitment can later be set aside simply because the business performs badly.

As a prospective franchisee, you therefore need to distinguish between your right to information and the risk you actually accept. A successful franchise network depends on clear expectations, but belonging to that network does not transfer your personal payment obligations to anyone else.

4. Negotiate limits and stress-test your personal finances

Ask for limits before the financing and business set-up arrangements are finalised. Negotiating points could include an overall liability cap, a guarantee limited to a named credit facility, and a gradual reduction in liability as the debt is repaid. Also discuss whether the security can be reviewed once the company has demonstrated a consistent ability to pay.

Distinguish between a cut-off date for the debts covered and an actual release from liability. A guarantee may stop covering new debts while liability for existing debts remains. Ask for clear terms and written confirmation from the creditor when you are released from the guarantee.

Then stress-test your personal finances with your adviser. Assume that the business cannot pay and that demands under several guarantees arise at the same time. Assess the consequences for your home, savings and day-to-day household expenses. Do not treat a possible sale of the business as a guaranteed way out.

Practical takeaway: Do not sign a personal guarantee until you can say who may demand payment from you, for which debts, up to what amount and how your liability ends. Have an independent lawyer review all the security arrangements together.