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Oct 2, 201812:47 PMExit Stage Right

with Martha Sullivan

Personal guarantees — When business is personal

(page 2 of 2)

Second, have a parallel agreement in place between the owners outlining what happens if the loan goes into default. Specifically:

  • Consider what the basis for the allocation of liability should be. It’s not as clear-cut as it may appear. For example,
    • Should the allocation simply follow the ownership percentages?
    • Should a passive shareholder be on the hook as much as an active shareholder who may be making management decisions?
    • Should each generation be held as responsible as the other even though they may not be in a position of influence and decision-making? How should this evolve as roles and responsibilities evolve?
    • What happens after an owner exits? Many personal guarantees survive past ownership and into death, becoming an obligation of the estate. (Surprise!)
  • Come to a conceptual consensus and get legal counsel to talk through a skeleton agreement. There are technical aspects to recourse and recovery. Like a tough neighborhood, you don’t want to go into this one alone!
  • Prepare before you go to the bank:
    • Don’t wait until the last minute. There is a lot of momentum as a company zooms to closing a loan. By then, people are anxious to get the deal done and use the borrowed funds. There will be pressure on everyone to “just sign,” which only sets the stage for bad things.
    • Don’t have these conversations in front of your banker. Come to them prepared and with your act together. Remember, you want these folks to have confidence in you as they loan you money.
    • You want your documents to work well together. The bank may have specific language that it wants in one or both agreements. Having a skeleton of the agreement between the owners ahead of time will be helpful in the discussions with the bank.
  • Be patient and vigilant. The bank requirements may influence your decisions as individuals and an owner group. Expect that there could be several meetings, conversations, and drafts to arrive at your final documents. Resist the temptation toward blind optimism and to abandon getting the owner agreement. 

Being in default is hard enough. Being in default and left holding the bag is far worse. Personal guarantees are personal, but they are all business when it comes to the courts. As always, be prepared.


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