WHAT IS A PERSONAL GUARANTEE - WHY YOU SHOULD THINK BEFORE YOU SIGN
Feb. 10, 2021
Franchisors require virtually every person who buys a franchise to sign a personal guarantee, even if they plan to operate the franchise through a through a corporation or limited liability company. You should think twice (or more) before signing a personal guarantee.
A personal guarantee is a binding contract that makes you personally liable for performing every term of the franchise agreement, including not only operational terms, but also financial terms liability for lost future royalties and attorneys’ fees and non-competition covenants. You should assume that personal guarantees are enforceable. They are.
A personal guarantee is not a “standard form” or “normal” or something “you don’t need to worry about.” A personal guarantee means that if your franchised business fails, the franchisor can sue you, personally, for money damages. Business ventures fail every day. When they do, everyone who personally guaranteed a debt or obligation of that business (whether it be a franchise agreement, a lease, or a loan) is personally responsible for the entire balance of the obligation. The person who signed the personal guarantee has no defense. You can be called upon without notice or warning to write a big check. In most cases, a creditor can have a judgment against you within about forty-five days and can start collecting (think seizing bank accounts, garnishing earnings, and placing a lien on your house and other assets) within another ten days or so. Translating that into simple, plain language, you could go from comfortable to bankrupt in two months—all because of that “standard” personal guarantee.
In addition to the financial exposure, many personal guarantees extend to operational obligations. By signing the document, you are agreeing to not compete with the franchisor, and you are agreeing to cause the business to strictly operate according to the rules set by the franchisor—rules you probably will never see unless you are the operating person. You could be sued by the franchisor or see your liability accelerated because someone made a sandwich wrong or failed to stay open until midnight. If you are asked to sign such a document, it would be prudent to consult with an experienced franchisee lawyer about ways to limit the scope of what you are asked to sign.
Finally, many personal guarantees purport to remain in effect forever. That could mean you remain exposed to liability as a guarantor even after the franchise agreement (or other agreement) is terminated or transferred. If the franchise is sold to a third party, you could find yourself to have guaranteed the performance of that third party—whom you do not know and cannot control. You are probably also subject to the post-termination restrictions, including agreements to not compete. If you are asked to sign a personal guarantee, even if you are the person operating the business, you need to consult with an experienced franchisee lawyer about how to limit the duration of the obligation.
A personal guarantee is a serious undertaking. It may be presented by the franchisor or other beneficiary as almost an after-thought. It may be buried in the back of a large stack of documents. However, it is one of the most consequential documents you will be asked to sign. It can make the difference between losing your franchise investment and losing your house. You should proceed with care and think twice before signing a personal guarantee.