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Clint Gharib
Founder of The Gharib Group-Integrous Investing.
Entrepreneurs are known to have spines of steel, but if you want to see one flinch, mention personal guarantees. If you are starting or growing a business, you’re probably covered head-to-toe with personal guarantees. As entrepreneurs we know supply and demand is as much about credit as it is customers.
So why are personal guarantees so scary? Personal guarantees are an agreement to be responsible for the debt if the business cannot pay it. It makes the signee (guarantor) personally liable for the debt or obligation of the borrower – like co-signing for your child’s car. As BusinessDictionary.com says, “It’s like a blank check without a date.”
From the lenders standpoint, personal guarantees hold the guarantor much more accountable. It’s one thing when you can just walk away from your debt with a damaged credit score, but it’s another when you could lose your house or family farm. Once signed, they throw our personal life into the crosshairs of our business risk. For many, the primary personal asset is their home. For businesses with neither capital nor credit history, personal guarantees are as commonplace as having a checking account. Yet we hide the topic in a “closet” because we don’t want our employees thinking, “If the business can’t get credit, will I get a paycheck?” As they say, “fake it until you make it.” Well, it’s time to drag personal guarantees out of the closet, and I’ll start with mine.
My family had a “near death” experience with personal guarantees. When I was a kid growing up in Indiana, my mother and I opened our restaurant, C&S Chaparral, the first day of summer in 1981. As an aspiring entrepreneur, my mom signed personal guarantees for certain equipment leases plus our main food distributor. Besides our animals, the only real asset she had for collateral was our home. Now you can’t run a restaurant without a good walk-in refrigerator or food supply. Like many new businesses we had limited capital and no business history so companies extending credit to us required more than just a handshake and a bill of sale. These were agreements that said if the business couldn’t pay its debt, then my mom and everything she owned would be personally liable for the bill. Sometimes you can limit the guarantee to specific assets — a point we learned later. I still remember reading the words in the guarantees “the liability of the guarantor is immediate, unlimited and unconditional….”Mom caught the restaurant bug working at Cardone’s Italian restaurant in Ft. Wayne. She was able to open her own restaurant using a small inheritance. She started me out as a dishwasher and made me learn the business from there. It was a lot of hard work and longhours, but it was worth it – we were building our business. By our fourth year, business was going well and we had a reputation for quality and fair prices, but the farming crisis and steel slide in the 1980s didn’t spare little Columbia City. During a slow business period that seemed to go on and on, cash flow management became juggling bills. Two years seemed to wipe out the previous five and the personal guarantees that we had forgotten about during the first few dream years started to cut into my mother’s psyche.
My family had a “near death” experience with personal guarantees. When I was a kid growing up in Indiana, my mother and I opened our restaurant, C&S Chaparral, the first day of summer in 1981. As an aspiring entrepreneur, my mom signed personal guarantees for certain equipment leases plus our main food distributor. Besides our animals, the only real asset she had for collateral was our home. Now you can’t run a restaurant without a good walk-in refrigerator or food supply. Like many new businesses we had limited capital and no business history so companies extending credit to us required more than just a handshake and a bill of sale. These were agreements that said if the business couldn’t pay its debt, then my mom and everything she owned would be personally liable for the bill. Sometimes you can limit the guarantee to specific assets — a point we learned later. I still remember reading the words in the guarantees “the liability of the guarantor is immediate, unlimited and unconditional….”Mom caught the restaurant bug working at Cardone’s Italian restaurant in Ft. Wayne. She was able to open her own restaurant using a small inheritance. She started me out as a dishwasher and made me learn the business from there. It was a lot of hard work and longhours, but it was worth it – we were building our business. By our fourth year, business was going well and we had a reputation for quality and fair prices, but the farming crisis and steel slide in the 1980s didn’t spare little Columbia City. During a slow business period that seemed to go on and on, cash flow management became juggling bills. Two years seemed to wipe out the previous five and the personal guarantees that we had forgotten about during the first few dream years started to cut into my mother’s psyche.
Bankruptcy began to seem inevitable, and it was then that we learned the true bite of the personal guarantees: If she declared bankruptcy, the business debts might have to be satisfied by the sale of our home. You form an LLC or incorporate to protect your personal assets from your business — but once you sign a personal guarantee, you’ve provided open access to your assets.
In our darkest hour late in 1987 we were blessed with good fortune and a sympathetic vendor (I’ll go to my grave singing the praises of The Broaster Company). While the stock market crash in 1987 was a horrific event for some, it turned out to be a blessing in disguise for us. The biggest one-day drop on Monday, Oct. 19, provided me with the opportunity to invest my unspent student aid for the rest of that college year in shares of United Telecom (now Sprint). The gains made from this gamble provided a desperately needed respite for our family.
If only my mom and I had known then what I know now: While gambling the college fund is no business plan, the good news for you is what we learned too late: There are ways to get rid of those guarantees. We should have re-negotiated the lease and supply contracts when we had a surplus after the first several years of rising profit. A tax attorney, Cal Bomar of The Bomar Law Offices, told me: Personal guarantees “are definitely a very big deal. I see clients for whom it makes the difference between a failed business and having to file personal bankruptcy. I have seen people get off of them by taking company financials to the bank/landlord and convincing them that it is not risky to remove them as guarantors.”
The holder of a personal guarantee may agree to renegotiate is to maintain goodwill in a proven relationship. In our case, with the farming crisis affecting our market, we could have tried to leverage competing suppliers. Also, we could have told the equipment company to take its equipment out and threatened to replace it with equipment from another vendor if they wouldn’t sign a new lease without the personal guarantee.
A former employer of mine told me that he got out from under personal guarantees for an office lease by moving the office to a new space with a new lease that didn’t include a guarantee. It was one of the factors he and his partner considered when deciding whether to move or stay in the old space.
Another innovative way of attacking this problem when times are good is to periodically gather with creditors and say, “Okay, you want to keep me as a client? Well today we’re turning the tables and tearing up those personal guarantees, because with your help, we are now past them.”
Those are the tables I wish my mom had turned.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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