If you’re a business person and you’re leasing commercial space, you’ve probably come across personal guarantees. Most commercial leases for high quality space include a personal guarantee. It’s incredibly important that you understand what impact they can have to you personally and professionally. Most small businesses don’t succeed, so it’s important to have a plan for what to do if the business fails. I always advise a business person to have an exit plan that includes some bankruptcy planning. What are you going do if the business doesn’t do well? So, if you’re signing a personal guarantee, if you’re signing in a shopping center or even you know a warehouse, flex-pay space, complex, that could be a few million dollars. And so, should your business start to fail and you have seven years left on the term of your lease and you have signed a personal guarantee, you could be on the hook for a few million dollars.
- Bankruptcy Planning. If you’ve got a long line of creditors, your landlord may not want to spend the money to go after you for that or he may have a very low probability of getting anything out of the bankruptcy but you still, when you get to that point, that’s not a great option. So, my advice is always talk to a bankruptcy attorney in advance. Usually, what that means is putting all of your assets that you want to keep in your wife’s name or your spouse’s name or a trust, it means that you’ve thought through and you only are personally connected to things that are connected to the business and that you can afford to lose. So, worst case scenario is that your business starts struggling, you get behind, and suddenly, you luck up and the only option for you is bankruptcy and your house, your car, your stocks, your rental properties, everything is in your personal name. And that means when you start trying to figure out how to work your way through the bankruptcy, the bankruptcy trustee has access to all of those assets. Please talk to a bankruptcy attorney.
- Franchise Agreement. Also, look at your franchise agreement. It’s a great idea to have an attorney look at your franchise agreement. Often, there’s language in there about what will happen if the business shuts down. Worst case, the franchisor may have the right to step in and take the business. Often the franchisor has the right but not the obligation to satisfy the lease–and this could potentially save you from having to satisfy the personal guarantee.
- Waiving the Guarantee. Finally, there may be a chance with a strong balance sheet, you don’t have to sign a personal guarantee, or the corporate guarantee may be strong enough to satisfy the landlord. That’s something that could be negotiated away by the commercial broker whose representing you on your lease. Also, if you’re renewing the lease and you’ve been there for a long time, there may be a way, an opportunity to do away the personal guarantee. It’s also important to remember that if you sell the business you may not be released from the personal guarantee–this needs to be a part of the conversation if you sell your business.
Hopefully that’s helpful. Again, this is Jonathan Aceves. Thanks for watching and have a great day!