Personal guarantees in franchising: limit the risk before you start

When turning an existing business into a franchise, you need to decide what security the relationship actually requires. A personal guarantee can protect certain claims, but it can also transfer significant financial risk to the franchisee’s owners. For a sustainable franchise network, any guarantee requirement should therefore be carefully considered, understandable and clearly limited — not simply a standard clause carried over from a contract template.

Start with the risk, not the guarantee form

A personal guarantee means that an individual accepts responsibility for someone else’s payment obligations. If the franchisee operates through a Swedish limited company (aktiebolag), the company will normally be the contracting party. However, a separate guarantee can still make the owner personally liable for the obligations it covers.

Start by identifying your actual exposure as a prospective franchisor. Do you supply goods on credit? Do you allow the franchisee to defer payment of the initial fee? Or is the main risk that ongoing fees may go unpaid? Different risks call for different solutions.

Draw up a simple list covering:

• what debt could arise,
• when it arises and how long it could remain unpaid,
• what other security or payment procedures are in place,
• what loss would remain if the franchisee’s company could not pay.

Then consider whether shorter credit terms, phased deliveries or a limited deposit could manage the risk. These options also tie up capital or affect operations, but comparing them helps establish a sound basis for any guarantee requirement. Do not demand personal security for vaguely defined future risks simply because it feels safer.

Define exactly what the individual is guaranteeing

Swedish law recognises different forms of guarantee. With a simple guarantee (enkel borgen), it normally has to be established first that the debtor cannot pay. With a guarantee as for one’s own debt (proprieborgen), often expressed in Swedish as “såsom för egen skuld”, the creditor can demand payment directly from the guarantor once the secured debt falls due. This distinction needs to be explained clearly to the person signing.

Have a lawyer draft the guarantee around the risk you have identified. The following questions should have specific answers:

• Which debts are covered? For example, specified fees or supplies of goods, rather than automatically every conceivable claim under the franchise agreement.
• Is there a financial cap? State whether interest and recovery costs fall within the cap or are payable in addition.
• What period does it cover? Distinguish between when a debt arises and when a claim can be made.
• Who can demand payment? Identify the legal entity that benefits from the security.
• What happens if the agreement changes? Do not assume that an existing guarantee automatically covers new obligations.

If several people provide guarantees, their respective liabilities must also be clear. Joint and several liability can mean that one person has to meet the entire payment demand within the limits of the guarantee. This is different from each person being liable for a specified share.

Make the guarantee requirement clear before signing

Sweden has no comprehensive franchise-specific legislation, but it does have the Act on Franchisors’ Duty to Disclose Information (2006:484). This requires franchisors to provide clear, understandable written information about the implications of the agreement and other relevant matters in good time before the franchise agreement is entered into. The minimum disclosure requirements include fees and other financial terms.

A personal guarantee requirement is an important financial condition. Explain it clearly in the information provided to support the prospective franchisee’s decision, and supply the guarantee itself for review alongside the other documents. The Act does not prescribe a general fixed consideration period in days; plan the process so that the implications can genuinely be assessed before any agreement is signed.

Liability under a guarantee is not determined by the disclosure legislation alone. General contract law and the rules governing guarantees must also be considered. Disclosure therefore does not replace legal review of the security itself.

Also distinguish between the signatures: an individual may sign the franchise agreement as a representative of the company and the guarantee in their personal capacity. Explain this distinction explicitly. Encourage the prospective guarantor to seek independent legal advice, and keep records of which documents were provided and when.

Plan for monitoring and release

A guarantee needs to be managed throughout the relationship. Appoint someone to keep track of its scope, financial limit, any time limits and the conditions for release. Store signed documents securely and restrict access to personal data.

Decide at the outset whether the security should be reviewed when credit exposure falls or the business becomes established. If you offer the possibility of reducing the guarantee, specify the criteria to be assessed and who will make the decision. Do not promise automatic release if it depends on a separate assessment.

Changes of ownership, renewals and termination require particular attention. Distinguish between liability for debts already incurred and liability for new obligations. Confirm in writing what ends and what, if anything, remains in force; ending the franchise relationship does not in itself extinguish every guarantee.

Practical takeaway: Assess your credit exposure first. If a personal guarantee is needed, limit the debts covered, the amount and the duration — and make the route to release as clear as the initial commitment.