How Do People View Personal Guarantees?

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09/17/2020 Redacted Redacted

searcher Harvard University - Harvard Business School Massachusetts Institute of Technology

HOW DO PEOPLE VIEW PERSONAL GUARANTEES?

I'm just curious how people view signing personal guarantees on purchases.  Have you needed to it?  Do you walk away from a deal if it requires it?  Under what circumstances are you willing to sign it?

2 likes 150 views 10 comments

University of Virginia-Darden - Darden School of Business Virginia Commonwealth University - School of Business - 09/17/2020

I did it with little hesitation on my first deal but don't plan on having it in subsequent acquisitions. You can acquire without personal guarantees but some deals warrant them. I feel my first one did warrant it because the ebitda multiple was fairly low upon acquisition.

like reply | 0 likes

searcher Northwestern University - Kellogg School of Management Massachusetts Institute of Technology - 09/17/2020

I think in the micro world (say like <$5M in revenue) it's the norm on acquisition debt, and a wide range of types of commercial credit accounts - credit cards, commercial auto financing, trade vendor accounts for larger and more sophisticated suppliers. The bigger you become, the more operating history you have, and the smaller the deal is relative the total enterprise value, the less likely it is to be required.

I've heard it's not uncommon for businesses even as big as $10M in revenue to be personally guaranteeing their credit accounts. At that level though, it may just be to get the most favorable credit maximums and payment terms.

like reply | 2 likes

intermediary The University of Chicago - Booth School of Business Illinois Institute of Technology Cleveland State University - 09/17/2020

For all practical purposes, PG is a must. No education nor corporate management experience can substitute for managing a business as an owner. Hence, lenders and sellers (if they are financing a deal) will want PG. Few exceptions are extremely underperforming business, a high price, a seriously high buyer equity, or the value of buyer's social image in case of a default.

like reply | 3 likes

searcher Washington University in St. Louis - Olin Business School - 09/18/2020

+1 Mike!

like reply | 0 likes

intermediary Illinois Institute of Technology University of Chicago University of Southern California University of Houston - 09/18/2020

Ah ha! As a younger entrepreneur doing my first deal, I signed the PG with our lender without missing a beat. It wasn't until several years later in a business hiccup situation that I realized the implications. Banks aren't your equity partner, so sign away. However, I would negotiate not to sign a PG (I didn't) with seller financing.

like reply | 2 likes

searcher - 09/18/2020

The risks are obvious and need to be carefully considered but I would say that if you do give a PG you can try to negotiate with your investors to have the debt considered as equity that you're contributing and get a bigger stake in the company accordingly.

like reply | 1 like

searcher Northwestern University - Kellogg School of Management Massachusetts Institute of Technology - 09/19/2020

I do agree though that signing the PG can and probably should be ascribed some equity value if there's outside equity involved, but a dollar for dollar exchange is an extreme and un-credible ask IMO. Debt isn't equity because it has to be paid back from the business' free cash flow before equity in accordance with the schedule. That is money not available to equity holders because it's busy re-paying your debt. The SBA prices their 80% guarantee at 3.5% of the total debt balance paid up front and that gets them 80% of the balance guaranteed. It would probably be a decent amount more than 3.5% to get to 100% simply because of the[redacted]phenomenon, but it's surely not 100%, otherwise what's the point?

like reply | 1 like

searcher Washington University in St. Louis - 09/18/2020

I would find anyway to complete the deal without a PG. With the uncertain economic environment for most businesses, having the PG could take you out of further opportunities should this situation not work. Protect your downside as much as you can.

like reply | 0 likes

searcher Harvard University - Harvard Business School Bucknell University - 09/18/2020

All PGs are not the same. I have done many. If there are adequate assets of the business between you and the bank, it is costless. If not, and I have done a few of those as well, you need to be certain about the deal's prospects with less margin for error.

like reply | 1 like

lender - 09/19/2020

depends on how much you have to lose, remember you can't fall from the bottom :)

like reply | 1 like

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