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?
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?
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.
I've heard of these mythical creatures but in my experience (18 years now), these lenders aren't accessible to most people. In other words, buyers either need to have cash, collateral, or a PG.
High net worth individuals are able to have negotiating leverage with lenders and succeed here. In contrast, even when I've attempted to "play banks against each other" I have not succeeded.
I believe I am getting to a point in my life where these non-PG loans will become accessible soon, but for individual searchers wanting 80%+ ownership of the business, I just haven't seen it.
Even in an extreme example, I spoke with a family office yesterday that was offering 12-15% annual interest loans and still asking for a PG. I honestly couldn't figure out their value prop other than "better than mezz debt!" ; )
In short, in situations where there is no PG, there is always something "behind the curtain" making it make sense for the bank. Would love your insights.
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.
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.