How do people view Personal Guarantees?

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September 17, 2020

by a searcher from Harvard University - Harvard Business School in Arlington, MA, USA

I'm just curious how people view signing personal guarantees on purchases. Have you needed to it? Do you walk away from a deal if it requires it? Under what circumstances are you willing to sign it?

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Reply by a searcher
in Alpharetta, GA, USA
I agree with Matthew’s point about it not being clear cut. If you go the SBA route (and I recommend it) you can definitely shop around and find an SBA lender who is willing to be more flexible about preexisting assets as collateral. Usually the selling broker’s preferred lender is the guy who is going to get you the best terms. The statutory SBA rules are what they are, but where there is a will there’s a way.

In my case, my wife was very uncomfortable with me even buying a business and we were able to rearrange our finances in certain ways to mitigate the risk to her. Getting her on board was the hardest part of the whole process - in comparison, closing the deal and running the business is a piece of cake!

As for the risk to the borrower (me/you) the main line of defense is to buy the business cheap cheap cheap and vet it as exhaustively as you can to eliminate fraud risk. Always think about the downside, not the upside. Whatever can go wrong will so eliminate as many risks as possible by focusing on certain types of business.
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Reply by a searcher
from Northwestern University in Los Gatos, CA, USA
I think in the micro world (say like <$5M in revenue) it's the norm on acquisition debt, and a wide range of types of commercial credit accounts - credit cards, commercial auto financing, trade vendor accounts for larger and more sophisticated suppliers. The bigger you become, the more operating history you have, and the smaller the deal is relative the total enterprise value, the less likely it is to be required.

I've heard it's not uncommon for businesses even as big as $10M in revenue to be personally guaranteeing their credit accounts. At that level though, it may just be to get the most favorable credit maximums and payment terms.
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