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Protecting your personal assets

Acquiring a franchised business, whether it is a new business or purchasing an existing franchise, is an expensive step that requires you as a prospective franchisee to consider many matters.

Recognising that you understand that there is risk in starting or buying any business, including a franchised business, you need to make a decision about the extent to which you are prepared to risk your personal assets.

This will depend on the business structure you choose to run your franchised business. If you own and operate the business in your own name, or in a partnership, you will be personally liable, alone or with others, for any debts of the business. If you operate the business through a company then you will not be liable for the company’s debts unless you guarantee those debts.

Franchisors often require the persons standing behind a corporate franchisee (usually the directors and shareholders) to guarantee the debts of the corporate franchisee. This is usually done by inserting guarantee terms into the franchise agreement and requiring the persons standing behind the corporate franchisee to sign the franchise agreement as parties. Sometimes the franchisor may require a separate guarantee agreement to be signed. The effect of the guarantee terms or a guarantee agreement is that the guarantors become liable for the obligations of the corporate franchisee, such as payment of franchise fees, if the franchisee defaults and cannot meet its obligations.

Further, many franchises by their nature require a premises from which to conduct the franchised business. If the franchisee is a company, and it leases the premises, then the landlord may require the persons standing behind the company to sign the lease as guarantors or sign a guarantee agreement by which they guarantee and debts or obligations of the company. If the company cannot meet those obligations, for example pay rent, then the persons who have signed a guarantee agreement or become guarantors, may be liable for the debts or obligations such as unpaid rent.

Prospective franchisees should think very carefully about whether they should sign personal guarantees. If the reason for choosing a corporate structure is to avoid liability for business debts and putting at risk your personal assets you should give serious thought to avoiding guarantee obligations. This may be achieved by negotiation and offering the franchisor or landlord an alternative to a guarantee. You should seek legal advice about these matters.

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