Do people actually get wiped out by personal guarantee?
December 15, 2022
by a searcher from University of Pennsylvania - The Wharton School in Atlanta, GA, USA
One of the scariest parts of going the self-funded acquisition / SBA debt route is the personal guarantee.
~17% is the best SBA loan default rate figure I've found, from study period###-###-#### which obviously includes a bad recession:. Source: https://www.nerdwallet.com/article/small-business/study-1-in-6-sba-small-business-administration-loans-fail (###-###-#### study period).
Does anyone know of a scenario where a PG wiped out a searcher, i.e. losing all retirement / brokerage assets and having primary residence seized? Does this actually happen? What does the path to get there look like and what other remedies are considered by the lender before going this route?
Assuming reasonable due diligence and relatively high leverage deal with
-Purchase price of 3 to 5x-Services/manufacturing business with minimal Capex needs
-Cap structure of 10-20% seller note, 60-80% SBA loan and 10% equity
Any perspectives on the 'realistic' level of risk involved with a PG are welcome.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) Retirement assets are protected by Federal law. These cannot be pursued by the lender in collection and are even protected in bankruptcy.
2) Having been a lender for many years, I can tell you the reason most lenders want a personal guarantee is so that the owner is incentivized to act in the best interest of the business and lender. Often times if an issue comes up, if the guarantor works with the Bank to properly work things out the Bank will recover more. That means less at risk for the Guarantor. Often times lenders will look to release a guarantee for a small payment or fee if the guarantor works with them through the liquidation.
3) Even the SBA has a process called an "Offer and Compromise" where if there is a default and a liquidation, a Guarantor(s) can offer a settlement post liquidation with the SBA and lender. Usually you provide a breakdown of remaining assets and offer something to settle the debt. If you home is tied in as additional collateral you might even be able to get that released with such a settlement as long as it is reasonable offer. Borrowers that cooperate with liquidation are much more likely to get a settlement done. Even the SBA would prefer to settle because to chase you in court on a guarantee or to foreclose on a 2nd or 3rd mortgage is expensive, and most Guarantors eventually file bankruptcy anyway. Just keep in mind if you default on government debt and the government takes a loss, you will not be able to borrow money from the government again unless you cure that loss at a future date, which I have had clients do before.
4) If the business fails and you have a big shortfall that the lender is pursuing you for, you can always file for bankruptcy. I would consider this a last resort, but it is an option. Typically I do not find that most searchers have much more in the way of assets than what they have already put into a deal. And remember, retirement assets are protected even in bankruptcy. So this sometimes becomes an option.
I hope this helps. If you would like to talk about your situation in more detail I would be more than happy to do so at redacted I have seen clients lose everything because of their personal guarantee, but most of the time they already had most of their assets tied up in the business or they were not cooperative with the Bank and SBA when the default occurred. The success stories I have far outweigh the negative stories I have seen, and even some of those who have failed have gotten out relatively unharmed.
from Texas A&M University in Elizabethton, TN, USA
Statistically, keep in mind those numbers include Existing businesses that take SBA loans too. Would be a nice to know percent of SBA acquisition deals that fail as a subset.
IMO, the more you treat the risk as very real, the less likely you are to have a problem.