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Congratulations! You’re closer to signing on the dotted line to become a franchisee. While this process can feel exciting, it can also feel overwhelming. There’s a lot of paperwork to consider, and some of the titles of the forms you’re signing may sound confusing.
One form that all franchisees are required to sign is the General Security Agreement (GSA). This form is important to understand because it impacts what the franchisor can get from you should the relationship go sour and what the banks need to lend you any funding you need to purchase assets for the franchise. Here’s what you need to know.
The Purpose of the General Security Agreement in Franchising
The GSA gives the franchisor a security interest in all the franchisee's property. This property may include elements needed to run the franchise, such as equipment, inventory, office furniture, etc.
The GSA ensures that the franchisee will honor the payment and performance obligations required under their contract with the franchisor. If they don’t, the franchisor can sue for damages by seizing those assets. In other words, this document protects the franchisor from risk, adding a layer of security to each new contract.
Who Must Sign the General Security Agreement?
The GSA will be presented to the franchisee as part of their initial contract. Through this document, the franchisee will guarantee that they will be held responsible if they should default on their obligations.
How the General Security Agreement Impacts Operations
For the most part, the day-to-day operations won’t be impacted by the GSA. The only time this document will come to the forefront is when the franchisee is acquiring new assets for the franchise. In this case, lenders will search provincial personal property securities for any liens. If there are none, the bank often puts a first-priority lien on the assets. However, the bank may refuse to provide financing if the franchisor has registered a lien. For this reason, franchisors will often become the second priority lien to the bank, allowing the franchisee to get the assets needed to operate the business.
The General Security Agreement After the Franchise Expires
When you enter into a new franchise agreement, the franchisor will have secured interest through the GSA and any registered liens.
If you terminate the franchise agreement, you’ll simultaneously terminate the GSA. Discharging lien registrations requires a few extra steps. To protect yourself and your assets as the franchisee, it’s important to get documentation that the franchise agreement and the registered liens were discharged.
Knowing the paperwork you’re signing is important, but it can also be overwhelming. Doing your due diligence as you move through the process will ultimately give you a smoother process once you’re rocking and rolling with your new franchise.
Kimberly Crossland is the founder of Roadpreneur and Cruisin' + Campfires, two companies designed to keep families together and living in freedom through travel and entrepreneurship. The goal of both businesses is to inspire meaningful change through the power of a strategic, thoughtful approach to life and business. In her free time, you can find her looking for a new adventure together with her two boys.