Partnership structure for providing personal guarantee

April 30, 2023

by a searcher in Illinois, USA

How have your structured your partnership with partner who is providing capital as well as only one providing personal guarantee ?
Would you provide him with "additional" stake for carrying the PG and risk ? How would you address in Op Agreement once he decides to cash out but he could still be a guarantor for life of loan. ?

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Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

Because the SBA PG is "joint and several" it is best you structure the deal with a single guarantor. Equity split is an entirely different issue. You could look at risk allocation. For example, if you sign the PG but have no significant net worth while the investor contributes a significant amount of equity, then the investor has more at risk than you have. On the other hand, if you take the PG risk and have personal assets covering a significant portion of the loan amount, it will be a different story. It also depends on deal attractiveness and who found the deal. So, there is no "right" or "fair" answer to this question.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

You could give additional equity for providing the PG, though i defer to a tax lawyer as to whether this would be a capital interest equal to the value of the guarantee or something else). If they cash out the additional equity then they probably should stay on the hook for the PG since they've been provided a cash value in exchange as a result of the buyout. I've also seen the company pay a fee % to the exited owner in exchange for maintaining the PG after an exit,

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