Personal Guarantees
October 15, 2022
by a searcher from Kettering University (GMI) in Detroit Metropolitan Area, MI, USA
One topic I have seen as of late is searchers who don’t want to provide a personal guarantee against the debt they assume. Is it possible to get an investor who only backstops the personal guarantee? In that case, what are the typical terms for the investor? Interested to hear advice from those who have experience with this.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If you are funding a transaction with an SBA 7A loan, then anyone that owns 20% or more of the business must sign a personal guarantee. You cannot replace that guarantee with someone else, but you could certainly seek to enhance the deal by having an owner with less than a 20% equity interest sign a personal guarantee as well.
If you are seeking conventional bank financing, it really depends on the size of the deal, the leverage, the type of acquisition, the type of collateral, etc. If it is largely a goodwill deal and there is not a ton of support, a personal guarantee is going to likely be required. If there is a strong enough outside investor willing to be the guarantor, then the lender might only look towards their guarantee. However, if that investor is not running the day-to-day operations, the the Bank still might want the guarantees of the owners who are running the day-to-day operations so that they are incentivized to do the right thing. If it is a large enough deal backed by a PE firm, then the Bank might just take a corporate guarantee from the PE firm and not even require personal guarantees.
If it is a non-bank lender, then it really depends on the deal and leverage. Some lenders don't require guarantees while others do, and some might do limited guarantees.
Again, there is no standard in the market. What I can tell you, is the more leverage you are seeking, the smaller the deal, the more exposure to goodwill versus hard assets, and the more experience you bring to the table, the higher the likelihood a lender is going to want you to guarantee. If you want to talk options on a specific deal, I would be more than happy to do so at any time. I can be reached at redacted
from State University of New York (SUNY) in Buffalo, NY, USA
As you can imagine it’s pretty difficult to price how many personal guarantees would pay out. Not to mention if you had PG insurance you would be more likely to pursue riskier deals as your downside is capped, but upside is not. Bit of an adverse selection problem.
As hard as a PG is to stomach for searchers I think there’s a lot of good reason they exist (from a lender perspective). It keeps the searcher from pursuing highly risky and speculative ventures. It also keeps a searcher bought in on a deal even if things go sideways. A searcher can’t just walk away from a company upon which they have a PG. I hate the thought of a PG as much as the next searcher, but if I’m not willing to stand behind a deal
why should a bank or any other investor?