Let’s Get Personal — About Those Guarantees

How many personal guarantees have you signed? If you are like most business owners and CEOs, you most likely have a lot more than you think. The majority of CEOs I’ve worked with have lost track long ago of personal guarantees they have signed.

If you have an American Express business card, a business loan from a bank or you process credit cards, you have made a personal guarantee. You’d be surprised where personal guarantees show up, and you may have signed some without truly understanding the consequences. Vendors, creditors, banks and landlords could all have asked for a personal guarantee.

I had a client once who told me he was setting up credit card processing for his business and the bank wanted him to sign a personal guarantee for any customer charge backs and the recovery costs for the life of the contract. He was able to negotiate with the credit card processor that he would sign a limited personal guarantee for one year. If he paid his bill on time every month, then after one year the guarantee would automatically drop off.

While this particular contract would probably not have involved a lot of money if he had complied as originally requested, it’s an example of how prevalent these guarantees are and how you may be able to negotiate better terms when asked to sign one.

Should you ever experience trouble with your business, those guarantees could spell trouble. I’ve seen way too many unfortunate consequences of business owners who did not keep track of or understand the consequences of these personal guarantees. They have lost homes, money, yachts and prize-winning horses to the person who held the strongest personal guarantee when their business failed.

One CEO thought his house was safe because it was in his wife’s name and he thought she hadn’t signed anything. But I found that she had signed a document at one point that put their house in jeopardy.

If a business is just starting out and has no credit record, then it’s customary to be asked for a personal guarantee by the bank or person who is risking their money or property. The bank has no other way of ensuring that the money will be paid back. But there is room for negotiation, as my client discovered.

All personal guarantees last forever but you can ask that the guarantee be dropped after a certain amount of on-time payments, as he did. Another option is to ask that the amount of the personal guarantee be limited to a percentage of the total amount or if you are willing to pay a higher interest rate, you could ask for the personal guarantee to be dropped altogether.

The important thing about personal guarantees is that you keep track of them and how much you have at risk. And if your business has been around for awhile and has established good credit, then you could ask to have the personal guarantee removed.


5 New Years Resolutions for Your Business in 2012, Part 3

It can be very easy to neglect your financials and just assume that as long as you’re making payroll, the lights are on and no tragedies are coming your way that all is well. But that’s not the kind of attitude that helps you protect and grow your business.

As 2011 draws to a close, resolve to sit down and review your business’ financial documents.

The most important thing here is that you’re honest with yourself.

Make or Break?

Compare the results of your financial statements with what you had planned for 2011. Would you call this a successful year? According to which metrics? Where did you over-perform? Perhaps you can adjust your expectations accordingly for 2012 and make more accurate projections. This will help you plan better in the coming year.

What goals did you miss? Why did you miss them? Was it some singular event or did things just not transpire as you’d hoped. The key is not just to review your financial documents but to act on the information you garner.

If you didn’t achieve particular goals, figure out what you can do differently. If it’s just because “the economy’s bad and no one is buying our [insert widget here]” then you better think long and hard about how 2012 is going to be different. The economy is not getting any better, and what people were reluctant to shell out for in 2011 is something they’ll be equally reluctant – if not more so – to shell out for in 2012. If you want to keep making payroll and enjoying the lights on, I suggest you think long and hard about how to do things better and different.

Review Contracts

Part of reviewing your financial documents is also pulling out contracts and agreements and giving them a once over. Are there any personal guarantees that you made a while ago and have proved yourself worthy of removing? Go back to the beginning. You never know where you’ll find a personal guarantee that just doesn’t need to be there anymore.

Take a close look at all of your agreements, including your business’s operating agreement, employee contracts, contracts with financial institutions and more. It’s not that you have to do this every year, but because I feel like you might not have done this in a while (or ever), now is a great time to review those documents and ensure that you’re protecting yourself and your business.

Meet with Your Financial Team

This is also a great time to sit down with your accountant and/or financial advisor and think about your budget, your taxes and your opportunities. Perhaps things went well this year and you should be purchasing some key items before the end of the year. Maybe there’s an opportunity that you should be considering, but both your accountant and financial advisor will be hard pressed to share those with you if they can’t review accurate financial statements.

So, in Closing, Look Closer

The end of 2011 is a great time to work on your strategies and goals for 2012, but you can’t do that without an accurate financial understanding of how things went this year.

So, resolve to sit down with a P&L, Balance Sheet and documents that share the details of your business’s KPIs. Even if the news is bad, you won’t regret having done this. It’s one of the most important ways to prepare for a successful 2012.

Did you meet your goals? How or how not? Please share in the comments below.