Franchisors generally require franchisees to sign a guarantee, individually pledging themselves to satisfy the debts of the entity owning the franchise. These guarantees are often designed to hold the individual franchisee jointly and severally liable with the business entity. Indeed, guarantees commonly permit the franchisor to move against the individual franchisee first, rather than the business entity, treating him or her as the principle obligator under the Franchise Agreement. For many franchisees, the primary purpose of creating the business entity was to shield themselves from the potential of personal liability and the guarantee requirement is a source of frustration and worry.
To exacerbate the problem, Franchise Agreements frequently require that spouses also enter into the guarantee, regardless of whether or not they intend to take an active role in the operation of the franchise. By having one’s spouse participate as an additional guarantor, the entirety of a franchisee’s personal assets are placed in jeopardy, including the assets owned jointly with his or her spouse. And, as noted above, satisfaction of the entity’s debt obligations may often times be sought against the guarantors first.
Efforts should be made during the negotiation process to not only keep the spouse off the guarantee, but to also limit the scope of the guarantee itself. If the franchisor is unwilling to yield on the guarantee requirements, especially as they pertain to the spouse, then a great deal of thought should be given before entering into the relationship.