New business owners, including franchisees, frequently agree to sign personal guarantees (or induce others to sign them) as additional security to franchisors, lenders, or vendors. In many cases, the guarantees are not necessary or limited. Franchisors and lenders typically seek personal liability to reduce risk, even when the added protection is unjustified.
Personal guarantees effectively void the liability protection of a corporation or LLC structure. When written assurances are essential to a transaction, the guarantor should
- negotiate limits to the maximum exposure (amount and duration),
- define specific circumstances leading to a call on the guarantee,
- specify future events to reduce the signer’s liability, and
- identify a final date nullifying the contract.
A personal guarantee is a contract between the signer and the body receiving the guarantee. It requires the same scrutiny and consideration as the franchise agreement, i.e., seeking legal advice before signing.