How to get comfortable with a personal guarantee?
May 23, 2018
by a searcher from University of California, Hastings College of Law in San Francisco, CA, USA
Can any seachers or lenders share their experience/thoughts on how a searcher can get comfortable with the personal guarantee on debt financing?
Despite our best efforts, sometimes deals can go bad. The personal guarantee can leave the entrepreneur with a lot of liability.
In addition, in theory, a searcher/entrepreneur could be fired out of their own company by the shareholders. That would leave the awkward situation of being liable under the guarantee but not having any operational control.
from Hobart and William Smith Colleges in Dorset, VT, USA
This week we offered to buy the stock of a deeply troubled company only 6 hours into our site visit. The offer was on Wednesday to close on Monday. They lacked money to fund the next payroll, vendors and customers are upset, employees are leaving and there are international facilities which must be shut down. Our offer was based ONLY on our ability to Not take risk.
To the OP;
I was previously tortured by a bank over a PG and I'll never let that happen again. The best way to avoid a PG is to over-shop your needs, get lenders competing for your business and make the PG a sticking point.
PGs can also be deconstructed with logic; What's the value in a PG - access to your assets, which can be accomplished without a PG. You can pledge or escrow certain assets. A PG keeps you from being a litigious jerk or someone who is going to fight good sense. That can also be overcome with legal agreements, waiving or rights, etc. They want you to be part of the solution and stick around and clean up the mess if something goes wrong, again, this can be solved with mechanisms other than a PG. My partner is a master at avoiding PGs, because he was also tortured by a bank in his youth.
No cash, no risk, no PG deals are possible but it takes tremendous deal flow and creativity to find them.
Good luck
from Fort Lewis College in Denver, CO, USA
Look, entrepreneurs take risks. Some make huge gambles and others more conservative, but I think risk is a defining characteristic of entrepreneurs. Most of the entrepreneurs that I know will work hard to mitigate downside risk, but it's part of the game. I've had searchers tell me that relocating along with the chance the company could fail showed he was taking a major risk already.
I think it is unlikely you buy a smaller business, with attractive debt terms without a personal guarantee. You never know if a deal is going to work 100%. Michael, your question was how do you get comfortable with the personal guarantee. I would guess I've made $25 million+ in personal guarantees. My rule of thumb was when I was###-###-#### % confident a deal was going to work (I am never 100% sure), then I "pull the trigger".
Another important attribute for me was a value add opportunity. I believe a deal that has very strong growth potential is one of the best ways to manage downside risk, If you grow cash flow by 50% and then hit tough times, that initial growth can make a downturn very manageable.
Hope that is helpful.