If you are in the process of selling your business this is one article you must read. In years past it was possible to lease a commercial property without a personal guarantee of payment. A personal guarantee says that a business owner agrees to pay for a business lease in the event the business is no longer able to fulfill the obligations of the lease. Today, it is nearly impossible to lease a commercial space without a personal guarantee of payment. Vendors and other people you do business with also at times require personal guarantees. Remember, if you sell your business you need to make certain that you have a signed release of guarantee from the landlord.
Personal guarantees often extend beyond a commercial lease agreement. Creditor accounts, vendors, and other business relationships will require a personal guarantee. If you sell your business and the new owner orders a substantial amount of inventory from a supplier and then is unable to pay you still are liable for that debt personally. It is so important to avoid all personal guarantees between you and the new owner operator of the business. This article could save you thousands of dollars and your personal financial stability. Many business owners have sold their entity, retired and later received a call from a creditor demanding payment.
If you are currently relocating your business you may be able to save yourself from a comprehensive personal guarantee. It is possible to negotiate the extent of your personal liability. At minimum, you’ll want to ask the potential landlord to carve out certain personal assets in the personal guarantee. This would include your principal residence, stock in the business, or other assets that you would want off the table in the event your business is unable to pay the lease. By negotiating with the landlord you may be more comfortable with a personal guarantee. Some landlords may be willing to allow a personal guarantee to decrease as your debt to equity ratio improves. The idea is to show that the likelihood of your business being unable to fulfill its obligations under contract are minimal at best.
If all else fails you may want to consider personal guaranty insurance. This type of coverage is relatively new but can cover up to 70% of payments to anyone exercising a personal guarantee. This type of insurance will also make all of your clients more comfortable with doing business. If your business clients know they are protected by a personal guarantee insurance policy you may gain leverage in negotiating future contracts.
For more information on how to facilitate the sale of your business and eliminate the possibility of future obligations or to better limit the scope of a personal guarantee, contact the Strong law firm today. Over the years we have helped many clients with various types of business law and litigation. Hiring an attorney on the front end can save you thousands of dollars later if the sale of your business is not handled properly. We offer affordable advice, often a flat fee.