Is it "market" to sign a Personal Guaranty on Seller Note
October 24, 2019
by a searcher from Southern Methodist University in Richardson, TX, USA
Currently negotiating an LOI, and we have shifted to Seller Note Terms. Is it typical to sign a personal guaranty for the Seller Note portion? I know it is typical for Seller to ask, but not sure if it is typical to negotiate that out of the terms. Thanks in advance for the help!
from Hobart and William Smith Colleges in Dorset, VT, USA
from Babson College in Boston, MA, USA
Instead, educate the Owner as to the totality of the risks to both sides, and work together to find win-win ways to mitigate those risks post-close.
The LOI phrase is often "Secured by the Buyer" but the "Owner" (and not the "Seller" entity) doesn't understand that the "Buyer" is the entity acquiring the company which guarantees the Note, not a personal guarantee outside of the entity.
My two cents....no body knows the company better than the owner selling it. He/she has an asymmetric information advantage over all other parties concerning what is being sold. Not only should this result in a lower interest rate on the Note, but you will likely already be taking a personal guarantee on the Bank Debt for an SBA loan, or your LPs will be taking one for a conventional loan.
It happens, but its not market. Even better, why would you agree to one? If the Owner is telling the truth he/she should be fine. If the Owner doesn't think you can run his/her company than I would suggest you lower your risk by lowering your price, as the impact of not being able to service debt hit much harder on the you who guarantees 60-80% of the EV than it does on the former Owner who is providing insurance in the form of Seller financing to mitigate your risks.
Seller notes mitigate risk to "Buyers". Your "Buyer" entity passes the risk of defaulting on the senior debt through to yourself as the person PG-ing an SBA loan (presumably). Taking a PG on the seller debt destroys the risk mitigation effect of the Seller Note.