What-Franchise-Issue-20.1

– like any other start up – which is why franchisors will treat it accordingly. “You’re setting up a new company that has no trading history,” says Fiona. Have director’s guarantees just appeared? Director guarantees in franchise agreements are considered commonplace in the legal arena – and have been considered so for some time. However, if you’ve franchised before but not encountered one, you’re not going crazy. “There are some circumstances where directors’ guarantees are not included for emerging brands,” confirms Fiona. “Some brands don’t include it when starting out because they’re trying to attract franchisees to the brand and because it’s onerous.” In these scenarios, brands will introduce the director’s guarantee once they’ve become more established. This can sometimes be a surprise to those initial franchisees when it comes to a renewal because it seems like a frightening addition – but is reassuringly normal. In other cases, the director’s guarantee is there in the first place but has been overlooked or misunderstood, as some opt not to seek advice before signing. “We’ve had a number of franchisees that have come to us that have signed agreements 10 years ago,” says Fiona. “They’re coming to us with a renewal and saying ‘this is really different’ and actually this was in the original, they just didn’t get any advice on the first one.” Why can directors guarantees be added to a renewal? It’s standard practice for iterations to make their way into franchise agreements when you renew. If you’re in the rare scenario where a director’s guarantee wasn’t there in the first place, it could be added within the renewal – regardless of your track record in proving your business’ financial health. “Most franchisors will review their agreements from time to time. It’s our advice to do so,” says Fiona. “In the last five to 10 years, there’s been a lot of franchise case law that has changed things and that will need to be addressed in new agreements that are put in place.” While there aren’t legal boundaries in how drastically a franchise agreement can be changed, there are ethical ones. “The current franchise agreement may differ from the original but ethically and in accordance with the BFA code of ethics which BFA members have to adhere to it shouldn’t be substantially different as to mean that you can’t operate the franchise profitability anymore,” says Fiona. Given that the director’s guarantee has no impact on the profitability of your business, it wouldn’t be deemed inappropriate to add one to a renewal contract if it wasn’t there in the first place. Does being a limited company help? Some franchisees believe there are protections against the director’s guarantee, such as operating as a limited company, however that is simply not the case. “Effectively, the guarantee cuts away all of that protection that the limited company gives and makes you personally responsible for entering into the franchise agreement and gives the franchisor security to enforce against your personal assets,” says Fiona. Can a cap be negotiated? There aren’t many safeguards that can be put in place against a director’s guarantee, should your business fail. However, you may be able to negotiate a cap prior to signing your franchise agreement – although this is only agreed upon in a minority of cases. This could mean that you’ll only be liable up to a certain amount, such as nine months cover on the amount of anticipated monthly royalty. How receptive a brand is to negotiation will be on a case-by-case basis. “It does depend on how established the brand is. If they’re a very established brand, it will pretty much be sign here, all franchisees will be expected to accept and give the guarantee, and there will be no room for negotiation,” says Fiona. “Where you have a more emerging concept or it’s a new brand to the UK, you may have more leverage in negotiating.” “Effectively, the guarantee cuts away all of that protection that the limited company gives and makes you personally responsible for entering into the franchise agreement” – Fiona Boswell, partner at Knights 30 WHAT FRANCHISE Issue 20.1