How do people view Personal Guarantees?

by a searcher from Harvard University - Harvard Business School

3 years ago

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?

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searcher

I agree with Matthew’s point about it not being clear cut. If you go the SBA route (and I recommend it) you can definitely shop around and find an SBA lender who is willing to be more flexible about preexisting assets as collateral. Usually the selling broker’s preferred lender is the guy who is going to get you the best terms. The statutory SBA rules are what they are, but where there is a will there’s a way.

In my case, my wife was very uncomfortable with me even buying a business and we were able to rearrange our finances in certain ways to mitigate the risk to her. Getting her on board was the hardest part of the whole process - in comparison, closing the deal and running the business is a piece of cake!

As for the risk to the borrower (me/you) the main line of defense is to buy the business cheap cheap cheap and vet it as exhaustively as you can to eliminate fraud risk. Always think about the downside, not the upside. Whatever can go wrong will so eliminate as many risks as possible by focusing on certain types of business.

3 years ago | like reply | 1 like

searcher from University of Pennsylvania - The Wharton School

The PG tends to be a necessary part of the life cycle of an entrepreneur... If an enterprise grows large and successful, PGs will not be needed, as there will be ample collateral + reputation + track record. They are needed to get things off the ground and grow businesses (my opinion).

It's worth really exploring what happens in a default situation with PGs involved. It might surprise you. Recommend spending a little money to "war game" scenarios with an attorney that deals with asset protection / default / bankruptcy / debtor-creditor negotiations / etc. It is not always as clear cut as it is made out to be.

3 years ago | like reply | 2 likes

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