Understanding What You’ll Be Asked to Provide – and Why
Most franchise agreements require the franchisee (and its related parties) to provide one or more forms of security to protect the franchisor’s position. In plain terms, these securities ensure that if something goes wrong — such as unpaid fees, failure to comply with the agreement, or early termination — the franchisor has a direct mechanism to recover losses without lengthy enforcement.
Generally speaking, the larger and more established the brand, or the higher the initial investment, the more extensive the security package tends to be.
Below are the main forms of security we commonly see in franchise arrangements.
1. Personal Guarantees
Almost all franchise agreements include personal guarantees from the directors or key individuals behind the franchisee entity.
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These guarantees make the individual personally liable for the company’s obligations under the agreement.
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They are standard across most systems, though the scope can vary (for example, joint and several liability, capped guarantees, or limited terms).
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In some cases, the franchisor may require supporting security from the guarantor as well — such as a PPSA charge or even a real property charge.
2. PPSA Security Interests
Under the Personal Property Securities Act 2009 (Cth), franchisors often register a PPSA interest over the assets of the franchisee entity.
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This gives the franchisor a secured position, ahead of unsecured creditors, if the franchisee becomes insolvent.
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A PPSA registration from the franchisee entity is now standard practice.
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However, some franchise agreements go further and require the guarantor to grant a PPSA interest over their personal property as well — for example, vehicles, business equipment, or other personal assets. This extends the franchisor’s security considerably and should be approached with caution.
3. Security Retention Sums
Certain franchise systems also require a security retention sum to be held by the franchisor.
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This sum may either be payable on demand or withheld from other monies owed to the franchisee, such as rebates or commissions.
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It is usually applied against outstanding fees, damages, or other breaches.
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The amount and the terms for release should be clearly set out, ideally with a defined timeframe for refund if the franchisee remains compliant.
4. Real Property Charge or Caveat
If a guarantor owns real estate, the franchisor may request that they grant a charge over the property or allow the franchisor to register a caveat on title.
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This is less common in lower-value franchises but not unusual in high-cost or multi-unit systems.
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It provides the franchisor with tangible backing for the guarantee and a direct right to recover from real property if the franchisee defaults.
5. Bank Guarantees
Some franchisors (and many landlords of franchise premises) require a bank guarantee as additional security.
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A bank guarantee is an undertaking from the franchisee’s bank to pay a fixed sum to the franchisor on demand if the franchisee defaults.
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It can be used in conjunction with other forms of security and often aligns with the lease obligations if the franchisor is also the tenant’s head lessor.
Assessing Risk
While franchise systems typically offer a higher likelihood of success than stand-alone businesses, there are no guarantees.
Both the incoming franchisee and any guarantor should carefully consider the level of personal exposure they are taking on. Before signing, think about:
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whether you could realistically meet these obligations if the business struggled;
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what assets are being exposed under the guarantee or PPSA; and
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whether there is any opportunity to limit or stage the security over time.
Negotiating Security Provisions
Like any commercial term, security requirements can be negotiated — particularly in smaller systems or where the franchisee is bringing valuable experience or capital to the network.
Security should always be proportionate to the investment and the franchisor’s and franchisee’s risk – the big, well established players typically require more erroneous security, while newer franchisor’s without a tried and tested model will require less. Similarly, smaller, mobile franchises (like trades) don’t carry the risk of some of the larger fixed premises networks, so less security is naturally required.
In practice, it’s about finding balance: giving the franchisor enough comfort to protect its brand, while allowing the franchisee to operate without unnecessary financial pressure.
In Summary
Franchisor security requirements protect the system — but they also expose the franchisee personally. Before signing, take the time to understand exactly what is being secured, by whom, and for how long. With clear advice and pragmatic negotiation, it’s usually possible to strike a fair balance between protection and commercial reality.