Buying a franchise: review personal guarantees before signing

Buying a franchise means joining a network, but the business’s financial risks can still fall on you personally. If the franchisor requires a personal guarantee, reviewing the company’s budget is not enough. You also need to understand which debts you could be required to pay yourself. This practical guide is for anyone planning to run a franchise in Sweden through a limited company (aktiebolag) and being asked to provide personal security.

1. Distinguish the company’s commitments from your personal liability

A Swedish limited company is a separate legal entity. As a shareholder, you are not normally personally liable for its debts, although there are statutory exceptions. A personal guarantee, however, means taking on a separate responsibility for someone else’s payment obligations — in this case, the company’s.

Check whether you are signing the franchise agreement only as a representative of the company or also making a personal commitment. The guarantee may appear in a separate document, an appendix or near the signature line. A document labelled a ‘shareholder undertaking’ does not, by its title alone, tell you what obligations it creates.

Two Swedish legal terms are particularly important:

• Simple guarantee (enkel borgen): as a general rule, liability to pay arises only once it has been established that the debtor cannot pay.
• Guarantee as for your own debt (proprieborgen): the wording ‘såsom för egen skuld’ means the creditor can demand payment from the guarantor once the guaranteed debt falls due, without first exhausting the options for recovering payment from the company.

Never assume that a guarantee applies only if the company goes bankrupt. Ask a lawyer to explain exactly when a claim could be made against you under the proposed wording.

2. Identify which debts are covered

Start by asking who can demand payment from you and for which obligations. Guaranteeing a specific fee is very different from accepting liability for all the company’s current and future obligations under the franchise agreement.

Draw up a simple list, with one line for each potential claim:

• ongoing franchise fees and other agreed payments;
• interest and debt recovery costs;
• damages or contractual penalties, if the guarantee covers such claims;
• obligations under appendices or subsequent supplementary agreements.

Next to each item, note whether it is covered, whether there is a cap and what triggers your liability to pay. Resolve any uncertainties before signing.

Negotiate an explicit overall cap. Check whether interest and costs fall within that cap or are payable on top of it. Also ask for the guarantee to be tied to a clearly identified agreement, rather than broadly covering all business dealings between the parties.

If several shareholders provide guarantees, you need to understand whether liability is joint and several. If it is, one of you could have to pay the entire claim, within the scope of the guarantee. An internal agreement to share the risk does not automatically limit the franchisor’s right to demand payment.

3. Agree how and when the guarantee will end

An end date for the franchise agreement does not necessarily mean that all risks under the guarantee disappear that day. Debts incurred earlier may remain outstanding. The wording may also extend the guarantee to renewals or changes in the business relationship.

Test the wording against specific situations:

• You sell your shares and leave the business.
• A new shareholder takes over your operational responsibilities.
• The franchise agreement is renewed or the fees change.
• The business closes, but the parties disagree over a final payment.

Ask what happens to your guarantee in each situation. Do not assume that a share sale or an approved change of ownership automatically releases you.

Negotiate a clear release mechanism, such as written confirmation from the creditor once replacement security has been accepted. Also ask for the treatment of existing claims to be made clear. A buyer’s promise to ‘take over everything’ is not the same as the franchisor releasing you from liability.

Consider proposing a limited commitment that reduces over time or ends once specified conditions have been met. This is a matter for negotiation, not an automatic entitlement.

4. Use your right to information and assess your personal exposure

Sweden has specific legislation on franchise disclosure: the Act on Franchisors’ Duty to Provide Information (2006:484). Under section 3, the franchisor must provide clear, understandable written information about the agreement’s implications and relevant circumstances in good time before it is signed. This information must include fees and other financial terms. A requirement for a personal guarantee should therefore be highlighted and explained as part of the overall financial risk.

The Act does not comprehensively regulate the franchise relationship or impose a general financial cap on guarantees. General contract law, including the Swedish Contracts Act, is also relevant. The duty to provide information should not be confused with protection against every onerous term.

Ask for the full guarantee document alongside the franchise agreement. Have an independent lawyer review it, and at the same time list any other personal security you have provided, for example to a bank or landlord. Assess the combined risk to your personal finances, rather than considering each commitment in isolation.

Practical takeaway: Do not sign a personal guarantee until you can explain who can demand payment from you, which debts it covers, the maximum amount you could owe and how you can be released from liability.