Debt without personal guarantee
March 28, 2024
by a searcher from New York University - Leonard N. Stern School of Business in Atlanta, GA, USA
Assuming an acquisition of a relatively stable business at a 4.0X EBITDA multiple - is there an equity stake level above which it would be possible to secure a loan without having to guarantee personally?
I would be very interested in reading about deals that have been structured with equity, seller notes, and debt where the debt did not include a personal guarantee.
If there are such examples, it would be most helpful to know the percentage of equity, seller note, and debt relative to the transaction's EV.
Thanks,
from University of Pennsylvania in Austin, TX, USA
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) The senior debt is likely $10 million to $20 million and higher
2) The loan to cost is below 50%
3) The debt service coverage ratio is 1.50x or greater with all debt included (including seller debt and mezzanine debt if there is any)
4) You have a corporate guarantee from a PE firm or some other entity to help back the deal
5) You have a non-bank lender doing the deal at higher interest rates and likely with some sort of warrants
6) The loan is more than fully secured by hard collateral after Bank advance rates with no goodwill exposure
7) There is substantial equity on the borrowing entity balance sheet and the total debt to tangible net worth is no more than 2 to 3x leverage
SBA lenders always require the personal guarantee. Most conventional banks in small business banking to lower middle market banking just about always require a personal guarantee. You need to get a really strong deal or a really large deal to get away from it.
I understand the concern about providing a personal guarantee. However, you need to understand it from a lender perspective. The lender is being asked to take on all of the risk in the transaction without a personal guarantee. Most lenders want to know the owners are going to stand behind the business. There is substantial data in the lender world that Bank's are significantly more likely to experience a loss and a much greater loss on transactions that are not guaranteed than those that are. That is because the risk of the owners walking away on a guaranteed deal are significantly lower. The guarantee incentivizes the owners to work with the Bank. The Bank almost always recovers more when the owners cooperate with a liquidation.
It is rare that I see personal guarantees get fully litigated by lenders. First, lenders must know what their shortfall is typically to pursue a judgement. Secondly, most guarantors negotiate with the Bank in exchange for cooperation some sort of settlement. Third, it is extremely expensive for lenders to pursue someone on their personal guarantee and you need to be sure you will get something out of it and they just will. not file for bankruptcy at the end. That is why most guarantees get settled out of court. Every situation is unique so I cannot guarantee a Bank would not pursue a strong guarantor or any guarantor if they so chose, but in general in 25 years plus in banking and even with the Great Recession, I probably have seen guarantors pursued post liquidation no more than a dozen times, and in most cases there was something to pursue or the guarantor was not willing to enter into a settlement.
If you want to maximize leverage and minimizing the amount of equity you need to give up to outside investors, you are going to likely end up with a loan with a personal guarantee. You need to weigh the rewards and benefits with retaining a higher upside but having more risk versus mitigating the risk with more investors but having minimal upside. I hope this information helps. Please let me know if you would like to discuss further at redacted Good luck.