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A personal guaranty is a contract, obligating the guarantor (usually the business owners) to the same bligations of the franchisee (usually a business entity) under the franchise agreement. Obtaining personal guarantees from franchise owners is common practice. Requiring the spouse of the franchise owner to sign a guaranty is also common practice.
Guarantors should read the guaranty closely to understand what they are being asked to personally guaranty. Is the guaranty joint and several? Joint liability means that the co-guarantors are each liable for the full amount of the debt. Are the guarantors entitled to notice of default? Probably not. Is the franchisor required to seek relief from the franchise business entity before going after the guarantors? Probably not. Does the guaranty apply to affiliates of the franchisor? Probably. Is the guarantor guaranteeing the payment of future royalties if the franchise agreement is terminated early? This can be a large damage claim.
The typical franchise agreement binds the guarantors to more than royalty payments and other fees. The guaranty will bind the owners to keep the franchisor’s trade secrets and proprietary information confidential. It will bind owners to indemnification against third party claims. It will bind the guarantors to non-competition obligations during and after the termination of the franchise agreement.
Many people sigh, and, just sign a guaranty. However, every contract can be negotiated; including the guaranty.
Generally, franchisors are most concerned about the restrictive covenants (non-compete/confidentiality provisions) contained in the franchise agreement. Understandably so. The franchisor is giving franchisees, and the franchise owners, valuable trade secrets. Operating a franchise is operating under someone else’s proprietary system. They need to protect that system. It is also an important component in getting a spouse to sign a guaranty. The franchisor needs to thwart franchisee schemes to continue the same business without the franchisor and around the restrictive covenants. So generally speaking, a franchisor will not agree to negotiate the restrictive covenants out of the guaranty.
Restrictive covenants aside, most of the guaranty can be negotiated, especially with newer and smaller franchise chains. Here are a few negotiation pointers:
- Limit the guaranty to the restrictive covenants and the payment of past due fees.
- Limit anything beyond number 1 to a certain dollar amount and/or time period.
- Limit the guaranty to the operating owners of the company.
- Limit the guaranty to the initial term only, except for the restrictive covenants.
- Limit the indemnification provision. Third party claims should not be the responsibility of the franchisee or guarantors if the franchisee is following the system.
- Limit any guarantor liability after the transfer of the franchise agreement.
Finally, watch for provisions in the franchise agreement that seek to tie the franchise owners to the franchise agreement. The guaranty isn’t always just a separate agreement.
Debra Hill is a partner at FisherBroyles, LLP practicing in the areas of franchise and intellectual property. She can be reached at 904-612-3780 or email@example.com