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.

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.

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.

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.

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.

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.

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.

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

There are so many lenders you can work with who don't require PGs, and I personally think it's worth paying the higher cost of capital to not have this stress. When things are going great in a business, nobody cares about the extra cost... but if things are not going so well, you'll be happy you didn't sign that PG!

There are usually a couple of criteria each bank has for personal guarantee requirements. One is company size. This varies from bank to bank but once you get to a certain EBITDA threshold then a PG can be waived. The other is collateral. If fully collateralized you can usually negotiate on a PG. that could mean limited, no PG at all or one that bleeds off over time. I will echo Walkers point though that a business below $3-$5 million on Ebitda Will most likely require a personal guarantee or the terms/equity won’t be palatable

My fund does not typically require a PG on our debt investments. Feel free to reach out: [redacted]

This thread is great - thanks for all of the input!

Great Question

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.

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.