Personal Guarantee… Don’t Leave Home (and Go International) Without It!

 

 

 

 

 

 

 

 

In most franchise relationships where the franchisee is an LLC, corporation or other business entity, the franchisor will require the individual or corporate owners of that entity enter into a form of guarantee whereby such owner(s) agree to:

  1. personally guaranty the monetary and other obligations of the franchisee entity under the franchise agreement; and
  2. be personally bound by the obligations and covenants of the franchisee under the franchise agreement, including those related to non-competition, confidentiality and restrictions on transfer.

While it is no secret that the owners of a franchisee entity are often reluctant to sign such a guarantee, franchisors typically face the strongest push back in the international context where prospects like to cite everything from “culture” to “religion” with a catch-all “insult to my business reputation” as reasons why they absolutely can NOT sign a guarantee document of any kind.

While I question whether the foregoing arguments asserted by a prospect in a foreign country are much different than the excuses that are readily pushed aside by franchisors when they asserted by a prospect here in the United States, franchisors are often more amenable to working with foreign prospects on the guarantee issue.
I believe this is because:

  1. the initial fees and overall initial investment associated with international franchise deals are, on average, substantively larger than the fees and investment a prospect must expend to develop domestically — and money can quickly take the driver seat in a contract negotiation; and
  2. franchisors generally have a more open mindset when negotiating international deals given the decreased regulation (in some, but not all jurisdictions) and the fact that international deals are more “one offs” rather than being one of many franchise sales that franchisor completes at the domestic level (and wants to keep as uniform as possible).

To that end, there are a number of options that a franchisor and/or an international prospect can propose during pre-sale negotiations in an effort to preserve franchisor’s interests while also giving some comfort to the prospect that he/she will not “lose it all” if the franchise relationship does not work out.

Among other things, this concession might involve

  • (a) capping the monetary liability under the guaranty,
  • (b) integrating a “sunset” clause into the guaranty that calls for the monetary aspect of the guaranty to extinguish once the franchisee meets certain development or other obligations without default,
  • (c) franchisee agreeing to provide a Letter of Credit, up-front Deposit or even escrow funds in an amount that makes franchisor comfortable moving forward without requesting a guarantee with respect to monetary obligations, or
  • (d) franchisee agreeing to maintain a certain level of cash and equity in the bank account that Franchisor can access (to both collect payment and monitor the foregoing levels) throughout the term of the agreement(s) at issue.

Regardless of how the guarantee issue is negotiated, it is important that whatever arrangement is made adequately addresses not only the business and intellectual property interests of franchisor, but also any jurisdiction-specific enforcement issues that might be present in the jurisdiction where the international prospect is looking to develop.

With that in mind, working with franchise counsel that has experience and existing local counsel contacts in the jurisdiction at issue can give you the edge when participating in these negotiations and is likely increase the chances that a reasonable arrangement will be made.

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