Buying a franchise through an LLC or corporation may feel like a way to separate company finances from your own. A personal guarantee waives that liability protection by making you responsible for certain business debts if the business cannot pay. Before signing a New Jersey agreement, it helps to know whether you are also making a personal promise to pay.
How a guarantee can affect you
This promise means the franchisor may seek payment from you directly if the company falls behind on certain debts or contract promises. That risk can continue even when the franchise operates through a separate business entity.
The guarantee may cover unpaid royalties, advertising fees, training costs, inventory charges or collection costs. Related documents, such as a lease or business loan, may include separate guarantees.
If the franchise purchase involves a loan backed by the U.S. Small Business Administration (SBA), anyone who owns 20% or more of the company usually must personally promise to repay the loan if the business cannot. In most cases, that promise does not have a set dollar limit unless the lender and SBA agree to limit it.
What to review before signing
Federal rules generally require the franchisor to give you the franchise disclosure document, or FDD, which explains key costs, rules and risks, at least 14 calendar days before you sign or pay money. Use that review period to look beyond the main agreement. Pay attention to:
- Who must sign the guarantee
- Whether the guarantee is limited or unlimited
- Which debts and fees it covers
- Whether it continues after missed payments, a sale or the end of the franchise agreement
- Whether a spouse or business partner must also sign
These terms matter because they can affect who remains responsible if the business struggles.
How New Jersey franchise protections affect personal guarantees
New Jersey law may give you certain protections, but those protections do not automatically remove personal responsibility under that promise. A franchise deal can affect how your business operates and how much personal financial risk you may carry. Reviewing the guarantee, franchise agreement, lease and financing documents together can help you understand the risk before the terms become harder to change.