Basics - Personal Guarantees When Buying A Franchise
Most franchisors require that franchisees individually obligate themselves to be responsible for and guaranty fulfillment of all contractual commitments, including monetary obligations, made by the corporate or other legal entity owning and operating the franchise.
A guarantee is a contract of secondary liability that binds the guarantor to perform upon the nonperformance of the primary contract. A financial guaranty provides a creditor, or in the case of the franchise relationship, the franchiosr, with additional collateral security in the form of the net worth of the guarantor, the franchisee.
Most guaranty obligations in the franchise context provide that the franchisor may proceed against the individual franchisee as if it was the primary obligor under the Franchise Agreement. The individual guarantor generally waives any right to require the franchisor to proceed first against the franchisee's corporate entity.
Guarantees are either found embedded in the Franchise Agreement, or contained as Exhibits or Schedules.
In many cases franchisors require that the spouse of the individual franchisee execute the guaranty obligation. The net effect of the guaranty by the spouse is to permit the franchisor to reach those assets held jointly in the marriage, such as bank accounts, investments, and residences.
