What the guaranty usually reaches
Most franchise guaranties make the owners personally responsible for the franchisee entity's obligations under the franchise agreement, and often under related agreements such as equipment leases or supply contracts. Many are unlimited in amount and continue after the entity closes or the agreement is terminated. Some also bind the owner personally to restrictive covenants, such as non-compete promises. Franchisors sometimes ask spouses to sign, which can put jointly owned assets at risk. Whether a franchisor can recover future royalties after an early closure is a contested question that depends on the contract language and the governing law. Many guaranties also waive defenses a guarantor might otherwise raise, which makes the exact wording important.
When the business is struggling
If the franchised business is in trouble, the guaranty affects every option. A bankruptcy filing by the franchisee company does not usually stop a creditor from pursuing the individual guarantor, and dissolving the entity does not end the guaranty either. Gather the guaranty itself, the franchise agreement, the lease for the location if the landlord also holds a guaranty, and any amendments or transfer documents. Keep the business's financial records, since damages claims often depend on actual sales. Do not stop operating or abandon the premises without advice, because the manner of exit can change what is claimed.
Negotiating an exit
Franchisors often prefer a negotiated termination with a release to the cost of pursuing an individual. Reviewing the guaranty language and the termination provisions is our starting point, along with the personal assets that may be exposed and any defenses, for example if the franchisor itself breached the agreement or the obligations were changed without the guarantor's consent. We then discuss whether a mutual termination, a transfer of the unit to a new owner, or a payment plan makes sense, and what release language is needed so that the personal guarantee ends with the deal.
