You must disclose everyone who will have an ownership interest in the business, whether it’s a business partner who will be active or behind the scenes in the business. To have an enforceable guarantee, there must be a valid, signed receipt page of anyone who will be a party to the franchise agreement. For whatever reason, signing the FDD sometimes throws people for a loop. Be sure and offer a little extra reassurance that by signing the FDD, they are simply acknowledging that they have received the document, and in no way are agreeing to a transaction.
Spousal Guaranty
While we recommend a spousal guarantee, legally, the spouse doesn’t need to sign unless the spouse will be actively involved in the operation of the franchise. However, there are advantages to obtaining a spousal guaranty. Such a document allows the franchisor to utilize spousal assets to inform their decision to award a franchise, and acts as a safeguard against a prospective franchisee hiding or transferring assets to their spouse.
This is an agreement with longevity. A spousal guaranty is written to outlive any changes in the marriage, so a divorced couple is equally as responsible for the guaranty as a previously married one.
The spouse guaranty prevents a franchisee from putting all funds in a spouse’s name to evade payment or collection of amounts due to the franchisor. This guaranty also binds the spouse to confidentiality and non-compete provisions, since we know that spouses talk.
Sometimes franchisors experience push back on the spouse guaranty. With more sophisticated candidates, such as those who may be part of multiple other franchise systems or may have extensive experience in the type of franchise being offered, often combined with a high net worth, we may propose capping the monetary liability of the spouse or accepting a Confidentiality and Non-Competition Agreement from the spouse instead, depending on the circumstances.
Sidenote: Lenders who require or accept spousal guarantees must abide by regulations set forth in the Equal Creditors Opportunity Act (ECOA).