Buying a Franchise in the UAE: Set Limits on Personal Guarantees Before Signing

You may choose a limited liability company to buy a franchise in the UAE, only to sign a document that puts your personal assets at risk if the business fails to pay its debts. That document is a personal guarantee, and it may be required by the franchisor, bank or landlord. When investing in a franchise, assessing the brand and the outlet’s profit potential is not enough. You also need to establish what you will personally be liable for if the company runs into difficulties, and when that liability will actually end.

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

When the company enters into a contract to operate the franchise, it is responsible for meeting its obligations, subject to any legal exceptions. However, signing as a surety or guarantor may create a separate obligation for you personally. The company’s limited liability will then no longer be enough, on its own, to protect you against claims covered by the guarantee.

Check the capacity in which you are signing each document. Are you signing solely as an authorised manager on behalf of the company, or in your personal capacity as well? A guarantee may appear in a separate annex, a clause in the franchise agreement, a financing letter or the lease. Do not assume that the company’s name at the top of the page settles the capacity in which you sign at the bottom.

Ask your legal adviser to explain wording that goes beyond a conventional guarantee, such as an undertaking to indemnify or an obligation as a principal debtor. The document’s title alone does not determine its legal effect: what matters is the substance of the obligation and the conditions under which a claim can be brought against you.

Before committing to the brand, ask directly: will the franchisor deal with the company without a personal guarantee? If not, what specific risk does it want to cover, and why is the security available from the business insufficient?

2. Understand the legal framework without assuming special protection

The UAE has no standalone federal franchise law, nor a general federal regime requiring a standardised pre-sale franchise disclosure document or a franchise-specific cooling-off period. Do not expect to receive a standard explanation of the required guarantees automatically. Request the documents before signing, and do not interpret the absence of franchise-specific disclosure requirements as permission to mislead.

Contractual obligations and guarantees are subject to the applicable rules of the Civil Transactions Law. Provisions of Federal Decree-Law No. 50 of 2022 issuing the Commercial Transactions Law may also apply, depending on the nature of the transaction. Federal Decree-Law No. 32 of 2021 on Commercial Companies governs company liability within its scope of application. Companies and arrangements in free zones, particularly financial free zones, require a review of the relevant legal regime.

Federal Law No. 3 of 2022 regulating Commercial Agencies replaced the previous Federal Law No. 18 of 1981. It may apply to a franchise arrangement registered as a commercial agency that meets its requirements. However, registering an agency does not automatically discharge a personal guarantee given to a bank or landlord.

Have each guarantee reviewed in light of its wording, governing law and the capacity of the parties involved. Do not assume that protections available to an individual borrower apply in the same way to someone guaranteeing finance for a company.

3. Map out every guarantee required

Bring together the draft franchise agreement, finance documents, lease and any purchasing credit facilities in a single file. Then create a table showing the beneficiary of each guarantee, the obligation covered, its cap and duration, and the conditions for making a claim and obtaining a release.

Look particularly closely at the following wording:

• All present and future amounts: this may extend coverage to obligations outside your original budget.
• Continuing guarantee: depending on its wording, this may remain in force after a particular amount has been repaid or the facilities have changed.
• Joint and several liability: this may allow a creditor to claim the entire covered debt from you, rather than only an amount proportionate to your shareholding.
• Coverage of costs and compensation: this may increase your financial exposure beyond the original fees or loan principal.
• Extension to amendments: this may bind you to increases in the company’s obligations without a new guarantee being signed.

If you have business partners, distinguish between your internal agreement and the creditor’s rights. An agreement between partners to share losses does not necessarily bind the creditor unless it has contractually accepted that arrangement.

4. Negotiate the amount, duration and conditions for claims

Start by asking for the personal guarantee to be removed if the company’s financial standing or available security is sufficient. If that is not possible, negotiate a limited obligation rather than accepting open-ended wording. You could propose a fixed deposit or bank guarantee as an alternative, taking account of its cost and impact on liquidity. These alternatives are neither free nor always suitable.

Request a clear overall financial cap and specify whether it includes costs and compensation. Tie the guarantee to a particular contract or facility, excluding future debts that have not been agreed. Propose a gradual reduction in the cap as the finance is repaid or objective performance conditions are met.

Also negotiate written notice of default, a period in which to remedy it, and supporting documents explaining the basis of any amount claimed. Ask your lawyer whether you can require the creditor to take steps against the company before pursuing you, rather than assuming this is a legal requirement in every case.

Finally, request that any increase in finance, addition of outlets or amendment to the contract cannot expand your guarantee without your express written consent.

5. Make release a document, not a promise

Do not assume that the expiry of the franchise agreement, the sale of your shareholding or your resignation from management ends the guarantee. Depending on the document and the applicable law, earlier claims or continuing obligations may remain covered.

Agree the release mechanism in advance: who issues it, what conditions must be met, and when will you receive it? Once those conditions are met, request written confirmation from the beneficiary specifying that your liability has ended and addressing any related security instruments.

The practical takeaway: do not sign until you know whom you are giving the guarantee to, what it covers, your maximum exposure and how your liability ends. If these elements cannot be clearly defined and limited, reassess the franchise purchase based on the risk to your personal assets, not just the company’s capital.