Franchise help

sensiblekate

I hope this is posted in the right place and thanks in advance for any advice. I am currently considering buying a preschool franchise. 

I have been looking at the pros and cons of setting up a limited company to buy the franchise, to give some degree of protection. However, the franchisor has told me that even if I do set up as a Limited Company, I will still have to sign as a personal guarantor as well. Would anyone know if this is standard practice or is this something I should be worried about? I would obviously be getting public liability insurance but know this won't protect me if the franchisor were to bring any claims against me.

 I know a claim against me by the franchisor is unlikely. Is this just a risk I have to take or is there insurance that would help mitigate the risk?

cymruchris

A personal guarantee means you'll foot the bill if things go belly-up.

What's the worst case scenario you'd see in 'how much you'd owe' if things went badly wrong? £5k? £50k? £500k?

Do you have any assets in your name? A property?

If for example you have a house, you sign the personal guarantee, and then it all goes badly, you then owe say, £20k - if you can't pay that from your personal funds, they could potentially push you into bankruptcy and get their share from the sale of your house (if there's a mortgage, that would be paid first).

It is quite common to see personal guarantees - so if you're absolutely confident it's the winning solution for you, and you've analysed the costs, the potential profit and have a sound business plan, I'm sure it would be worth a go.

If however you're on the fence as to whether things would work out or not - just keep in mind the potential outcomes if things went wrong for you personally.

DullGreyGuy

Its fairly common for newly founded companies as on day 1 most companies have pennies to their name and often debts to investors/directors. As such there is very little skin in the game and easy for the founders to decide to cut their losses and walk away hence people want personal guarantees, will want founders to be making notable contributions themselves not just working off third party finance etc.

sensiblekate

cymruchris said:

A personal guarantee means you'll foot the bill if things go belly-up.

What's the worst case scenario you'd see in 'how much you'd owe' if things went badly wrong? £5k? £50k? £500k?

Do you have any assets in your name? A property?

If for example you have a house, you sign the personal guarantee, and then it all goes badly, you then owe say, £20k - if you can't pay that from your personal funds, they could potentially push you into bankruptcy and get their share from the sale of your house (if there's a mortgage, that would be paid first).

It is quite common to see personal guarantees - so if you're absolutely confident it's the winning solution for you, and you've analysed the costs, the potential profit and have a sound business plan, I'm sure it would be worth a go.

If however you're on the fence as to whether things would work out or not - just keep in mind the potential outcomes if things went wrong for you personally.

This is really helpful - thank you very much! After my initial training, I will pay a management fee each month based on how many classes I run, this isn’t a huge amount so it’s not as though I will be building up debt with the franchise. 

I do have a house though, so this is definitely something I need to consider. The franchise has been running for over 15 years and every other franchisee is a sole trader and seems ok with that. 

Thanks again for your advice. 

Jeremy535897

The point is that a limited company with a personal guarantee to the franchisor only removes the protection from limited status on amounts due to the franchisor. If those amounts are likely to be small, and are likely to be paid promptly anyway (for the continuation of the business), it doesn't really matter. The franchisor just doesn't want to see a franchisee makes loads of money, not pay him, and wind up the company. Other organisations, like the bank, may also require personal guarantees though. Using a limited company can also have tax advantages and disadvantages.