What is the council actually asking for when it wants a parent company guarantee?
It is asking the company that sits above your care agency to stand behind the contract. In plain terms, if your trading company stops paying or stops delivering, the parent company promises to pay the council or keep the service running in its place. The agency still wins and runs the work; the guarantee simply adds a second, stronger company that the council can turn to if the first one fails.
Most care groups are built as more than one company for good reasons: the trade sits in one company, the group's spare cash and the shares in any other trades sit in a holding company above it. A council looking at the trading company on its own often sees a thin balance sheet, because the money and the value live upstairs. The guarantee is the council's way of reaching that stronger company. If you are weighing up how a care group should be structured in the first place, our care agency accountants page sets out how the pieces fit, and our management accounts service is where the numbers behind a guarantee actually get modelled.
There are two flavours worth telling apart from the start. A payment guarantee covers money the agency owes and does not pay. A performance guarantee goes further and obliges the parent to step in and deliver the service itself if the agency fails. For a care contract, where the council has vulnerable people relying on visits, a performance guarantee is the one that carries the real weight, because performing it can cost far more than any single unpaid invoice.
Is the council allowed to ask, and can we say no?
Yes, it is allowed, within limits, and yes, you can decline, though declining may cost you the contract. Public bodies buy care under the Procurement Act 2023, which came into force on 24 February 2025. Care services are bought as light touch contracts, a lighter set of rules the Cabinet Office confirmed in its light touch contracts guidance for social and health services, but the financial checks still apply.
The limit matters. Under section 22 of the Act, a contracting authority may only set conditions of participation that are a proportionate means of making sure a supplier has the legal and financial capacity to perform the contract, judged against the nature, complexity and cost of what is being bought. So a council cannot demand a guarantee for its own sake; it has to be a proportionate response to a real gap in the bidding company's strength.
Where that gap exists, the government's guidance on assessing suppliers' financial standing, updated on 30 September 2026, says a parent company guarantee may be sought as a mitigation, and that a written commitment from the parent is normally enough before the contract is awarded. The same guidance makes a point owners miss: the authority assesses the guarantor too, so a guarantee is only as good as the financial strength of the company giving it. Saying no is a commercial decision, not a rule you are breaking, but a council with a reasonable concern about a new or thinly capitalised agency is usually within its rights to ask.
Which company, and how much cash, does a guarantee put at risk?
The company at risk is whichever one signs as guarantor, and that is almost always the parent that holds the group's cash and your other trades. That is the whole point from the council's side, and the whole danger from yours: the guarantee reaches past the thin trading company and lands on the company where the value actually sits.
How much is at risk depends almost entirely on two words that the first draft usually leaves out: capped and time-limited. An uncapped performance guarantee does not stop at the value of the contract. If the agency fails mid-contract, the council can re-provide the service through another provider, often at short notice and higher cost, claw back money already drawn, and claim the extra it has to spend. The guarantee can be called for all of that.
Take an illustrative domiciliary contract worth about 1.1 million pounds a year, run through a trading company whose parent holds roughly 180,000 pounds of free cash. If the trade collapses halfway through, a realistic call on the parent is not a tidy slice of the contract; it is the clawed-back pay runs, the cost of getting the visits covered by someone else, and the council's extra costs on top. Put a worst case on it and the exposure climbs above the cash actually sitting in the parent.
This is why the figure that matters is not the contract value, it is the free cash and realisable assets inside the guaranteeing company on the day a call could land. Everything upstream of the trade, the spare cash you swept up for safety, the shares in a second home or branch, can be within reach of a single uncapped guarantee. Modelling that worst case before you sign is the difference between a measured risk and a blind one.
When should we sign, when should we negotiate, and when should we walk away?
Sign when the parent could absorb a realistic call without taking the whole group down, and the wording is capped and time-limited; negotiate when the exposure is real but the draft is open-ended; walk away when a called guarantee would sink the parent and the council will not move. The decision is rarely a flat yes or no, because most of the risk lives in the wording rather than the idea.
The good news is that you have more room than the first draft suggests. Because a written commitment from the parent is usually enough before award, there is time to shape the terms. The financial standing guidance itself points to alternatives: a performance bond from a bank or insurer, usually set at a percentage of the contract value, an escrow arrangement, step-in rights, or simply a cap on the amount guaranteed and an end date so the parent is not on the hook for every future renewal. A bond costs money, and that cost ends up in your price, but it ring-fences the risk outside your own companies.
Walking away is a real option too, and sometimes the right one. If the only way to win the contract is to expose the company that holds everything you have built, on terms that could not survive the trade failing, then the contract is priced wrong for you and the honest answer is no. A council that genuinely needs the service will often rather negotiate a cap than lose a capable provider over wording.
Your parent company guarantee review checklist
Work through these seven points before the guarantee goes anywhere near a signature. Each one turns a vague worry into something you can put a number on or hand to your solicitor as a specific ask.
- Name every company and mark the roles. Write down which company is bidding, which is being asked to guarantee, and what each one actually owns. The guarantor is the one carrying the risk.
- Decide if it is payment or performance. Read whether the parent only has to cover unpaid money, or has to step in and run the service. Performance is the expensive one.
- Find the cap, or the lack of one. An uncapped guarantee exposes the parent to the full cost of the council re-providing the service, not just the contract value. No cap is the single biggest red flag.
- Find the end date. A guarantee that survives the contract, or rolls automatically into renewals, keeps the parent on the hook for years longer than the work you are actually bidding for.
- Total the cash and assets in the guarantor. List the free cash and anything realisable sitting in the parent, because that is what a call lands on.
- Model the worst case in pounds. Trade fails mid-contract, council re-provides and claims the extra cost. Put a figure on it and compare it to point five.
- Decide your ask before it goes legal. A cap, a longstop date, a bond or escrow instead, or step-in rights. Hand your solicitor a specific position, not a blank worry.
What this means for your directors
A guarantee is signed by a director of the parent, and that signature carries a legal duty. The government's guidance on directors' general duties sets out that a director must act in the way most likely to promote the success of the company, and must exercise reasonable care, skill and diligence, judged by what a reasonably conscientious person would do in the role. Committing the parent to an open-ended guarantee without modelling what it could cost is hard to square with either duty.
In practice that means a board minute recording the decision, a modelled worst case attached to it, and, where the group is already under any strain, advice taken before signing rather than after. The same duties bite harder if the group's finances are fragile, because a director must act in the interest of creditors once a company is in difficulty. None of this is a reason to fear guarantees; it is a reason to sign them with eyes open and a paper trail behind the decision. LOYALS is a King's Cross firm of accountants and business consultants, and we model the real cash exposure in a care group's contract guarantees for owners and their solicitors across London, so the board minute has a number behind it rather than a hope.
If you run a care agency and the council has put a guarantee, an indemnity or an open-book clause in front of you, this is exactly the work our care agency finance team does alongside your solicitor: we model the real exposure, mark which company it lands on, and hand you a costed position to negotiate from. You can tell us about your contract through our care enquiry form and we will come back within a day.