Nurturing Spousal Support in Small Business Ventures
June 24, 2023
by a searcher from Western Illinois University in St. Louis, MO, USA
I'm seeking your collective wisdom to help me address some concerns my wife has expressed regarding the prospect of purchasing a small business.
My wife, who isn't inherently inclined towards entrepreneurship, has raised some valid questions that I'm hoping you can help me answer. I want to provide her with resources and insights beyond my own perspective, so she can develop a more informed and comfortable stance.
I will summarize anything provided to create a helpful resource for others as well.
Here are some of her questions:
What happens if the unfortunate event of my death occurs, leaving a personal guarantee on a significant loan for the business?
How can we ensure stability and continuity if I become incapacitated or hospitalized for an extended period, let's say, two weeks?
In the event that the business fails, what implications might it have on our personal finances and our future?
Is it necessary to invest all of our personal savings, or are there potential opportunities for securing investors or alternative funding sources?
I kindly request your input, advice, and any resources you can provide that may help address these concerns. Personal anecdotes, articles, podcasts, etc. are all greatly appreciated. The aim here is to empower my wife with a well-rounded understanding.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Whether you use SBA financing (which would require life insurance) or not, life insurance is the easiest way to protect your family from the risk of death. Term life insurance is not expensive and you would really only need it for the length of time of the loan, but you may want it longer to provide additional protection. This is probably the easiest concern to quickly mitigate.
As for becoming incapacitated, there are a number of options available. One thing we always highly recommend is working out a backup plan for in case something like that happens. That plan would include key employees or family members you can rely on to help cover you. You can also purchase disability insurance (although that really only covers your personal income) or look at some sort of business interruption insurance and see if that might help. But overall, having a succession plan in place is important and being sure key family members, like your wife, know enough about what needs to be done to step in if the case were to occur.
If the business fails, there is no question there is risk to you and your family. If you can keep your wife from being a guarantor on the loan, then the risk will largely relate to your financial position, If your wife has outside assets apart from you, then they would be protected. However, if you are both involved then there is always the risk a lender could pursue you. The primary reasons most Banks and even the SBA want the personal guarantee is to be sure you act in the best interest of the business in the future. Often if the business fails and you work with the Bank, and even the SBA, you can settle that personal guarantee as part of the workout. However, if you have assets there is no question the Bank has the right to pursue you personally. If they do that, then bankruptcy is always an option.
There is always risk is running your own business. The hope is that the rewards fall out distance those risks, but you need to do everything possible to mitigate the risks that do exist. And unfortunately, no everyone can be successful in business.
I have experience talking through with Borrowers and their spouses the risks associated with guarantying a loan and the different options they have. If I can ever be of any assistance, I would be happy to do so. I have seen lending from every angle, and have been involved in workouts both as a lender as well as a consultant, so I know how the process works from both sides. You can reach me here or directly at redacted At some point both parties need to get comfortable to move forward.
from Harvard University in Boston, MA, USA
Re: personal guarantee, I *think* your family would still be on the hook for that in the event of your passing away. However, you might be able to mitigate that risk by finding a business partner who would co-sign the PG for you in exchange for some of the upside of the business. I'm not 100% sure, but I'd be surprised if the banks wouldn't let you work out some arrangement like that.
Re: stability and continuity, I think this is an issue anyone with a significant amount of managerial responsibility would face (even at a large company). The key here is most likely building a strong bench of next-layer management who can keep the lights on if and when you need to step away. This is easier to do in a relatively big search business (>$3M EBITDA) than a relatively small one (<$1M EBITDA)
Re: business failure, aside from the personal guarantee (which traditionally funded searchers won't have), your personal financial risk should be fairly limited. The biggest thing you'll have lost is your time (opportunity cost) and many nights of sleep. Some search fund entrepreneurs cut or forego their salary for a period of time if the cash flow situation is dire., but that's a personal decision.
For resources, Jim Sharpe's blog is a good place to start (https://jimsteinsharpe.com/contemplating/funding-the-search/). Read his article on different funding options for 10,000 foot view.
I personally think the risk-reward profile of search is fantastic, but it's definitely not without its risks. Although, I think the massive layoffs in finance and tech are showing people that even "traditional" career paths don't always guarantee stability either.