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Molly Raycraft explores exactly what you might find in your franchise agreement, with the help of legal experts WHAT IS A DIRECTOR’S GUARANTEE? ome time ago, I received a message asking what the deal was with director’s guarantees and had there really been what was a perceived rise in their inclusion in franchise agreements.Where had they come from? And does anyone really sign one? The implications, after all, can be severe. In very layman terms, the director’s guarantee essentially makes you, the franchisee, personally liable for the financial failure of your business. It means if all goes wrong, the franchisor can get money from you by taking your assets – including your house. It’s a sobering thought and a massive antidote to the success stories that are usually encountered when being onboarded into a franchise. However, it is an important reality check that while franchising is an opportune space to build something lucrative, it’s also a big personal investment that needs careful consideration and expert independent advice. So, not being a legal expert myself, I spoke to Fiona Boswell, partner at Knights, Iain Bowler, partner at Freeths, Gurmeet Jakhu, franchising partner at Excello Law, and Emily Sadler, senior commercial solicitor at Harper James. These are professionals who have spent their careers aiding franchisees and franchisors in navigating the fine print of franchise agreements. What is a director’s guarantee? A director’s guarantee ultimately means you’ll pay from your own pocket should your business fail, which is why it can feel risky to franchisees. “For franchisees, a director’s guarantee introduces significant personal risk as the director becomes personally liable for all obligations under the franchise agreement, for the full extent of any losses suffered by the franchisor,” explains Emily. In some instances, the director’s guarantee may also be used to claim damages, rather than pay off debt, according to Gurmeet. “A suitably worded personal guarantee may be relied upon by a franchisor to seek damages and compensation following a breach of contract (including but not limited to termination of the franchise agreement) from the director personally, rather than the franchisee company,” says Gurmeet. Is the franchisee always the director? In the majority of cases the franchisee will be the director signing the guarantee. “It would normally be the owner and controlling director of that limited company,” explains Fiona. This could mean there’s more than one person signing the director’s guarantee. For example, four people who each own a 25% share of the company would likely have to sign the guarantee – making them all liable. Why do franchisors include director’s guarantees? From a franchisor’s perspective, franchising a business they’ve grown from the ground up can be risky because it brings more parties into the financial fold. The director’s guarantee protects them in case something goes wrong with a franchisee they’ve brought on board. “They’re looking for security,” confirms Fiona. “Ultimately they’re looking for a way in which to ensure that you’ll adhere to the franchise agreement.” It’s also important to consider that while you, as the franchisee, are becoming part of the brand, your business is your own entity S F R A N C H I S E A G R E E M E N T S 29 WHAT-FRANCHISE.COM Ins ights