I had a potential client come to me who had owned, with a partner, a franchised retail store. As the "franchisee", they were required to purchase products they sold from the "franchisor". They were each required to guarantee these purchases. These types of "personal guarantees" are very common in franchise relationships, and in many ongoing relationships between a business and its vendors.
A fews years after the business was started, the potential client had decided she no longer wanted to be part of the business, and her partner bought her out. The business was making money and its bills were paid. She trusted her business partner, knew that he would pay her, and didn't see a need to pay a lawyer to document the transaction.
Unfortunately, with the downturn in the economy, the business could no longer pay its bills, and had amassed a significant sum of money owed for product purchases to the franchisor. Her ex partner closed the business, and filed for bankruptcy.
And why was this potential client here seeking legal advice? She had just been served a lawsuit filed by the franchisor seeking over $100,000 from her personally. Yes, her personally. Why, she asked? She hadn't been involved in the business in years. She wasn't an owner when the products that hadn't been paid for were purchased. She could prove when she left the business, and that she wasn't involved.
Her problem was the personal guarantee she signed long ago. The guarantee stated that she was personally legally liable for the payment of any products by the business. The guarantee didn't state that she had to be an owner to be legally liable. In fact, it provided that she could notify the franchisor of any termination in her relationship with the franchised business, and that would end her personal liability. But, she didn't imagine that she would continue to be personally liable after she sold her interest in the business. Because she didn't hire a lawyer to document the sale of her business interest, no one took a "fresh look" at the existing documentation to determine what steps were needed to fully protect her. That process -- a sort of legal due diligence -- is critical, and can lead to very unfortunate circumstances.
So, be careful any time you buy or sell a business, or close down a company, or separate from a business partner. There can be unintended consequences that are easily dealt with at the time, and substantial if ignored. In these trying economic times, one can't be too careful.
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My husband and his friend have only been in business less than a year, and the cell phone contract is under his friends social security number, and they didn't have any credit cards, just a wells fargo bank account, and the office is a home office at his friends house.
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