What is a personal guarantee and why is it used? When getting a loan for a business or signing a lease the bank or the landlord wants a level of protection for what they are allowing you, the business owner, to borrow or use and if the business should fail, they want something of value to recover their losses.
For this article we want to look specifically at the personal guarantee that a landlord is requesting.
Landlords have the right to be protected for lost rent if your venture fails, but do they have the right to all your assets above and beyond the value of the lease? How does one determine the lease value?
It stands to reason that if you have 1 million dollars is assets and the lease is worth 1 million dollars over a year that this could be seen as equal value. But what if the lease value over a year is only 75,000 dollars? You would not want to put up your 1 million dollar asset against a 75,000 dollar lease. An important piece of information you the business owner will want to know to help your negotiation is what is the turnaround time to lease a space in your area?
Knowing this detail, one could argue that amount of time multiplied by the rent could be the value of the guarantee, and not the whole value of the lease term that the landlord may be trying to cover, as that is not realistic.
Negotiate your risk just as the landlord is.
- Limit the amount of the guarantee itself by offering a dollar value and or a percentage between owners if a partnership
- Limit the time period or ask for a decreasing step down over time based on the company’s debt to equity ratio or specific performance criteria, like on time payments over 24 months
- As your credit and relationship mature over time re-negotiate at set time points
- Carve out, exempting specific assets and or designating specific assets to be used or not used
- be the guarantor of collection, not the guarantee of payment, ask your counsel about this
- Limit the assets pledged to yours only and do not include your spouses, be prepared to show your assets
Don’t for a moment think you can move your assets into a trust after the fact; the courts will see this and overturn the change making that asset available to collect on!
Brian Bacher is a Business Advisor with Sunbelt Business Advisors, Greater Bay Area. He can be reached at (408) 436-1900, or at [email protected]. Or connect with Brian on LinkedIn. Contact your “Business Broker Near Me” today.