Personal Guarantees on Leases and Loans When You Sell
Your personal guarantee does not disappear when the business sells. How to get released from lease and loan guarantees before and at closing.
Words by
Matan Michael
Somewhere in your files is a lease, a bank loan, an equipment financing agreement, or a supplier credit application with your signature on the last page, next to a line that says "guarantor." You may not have looked at it since the day you signed. When you sell the business, the buyer takes over the operation, and whoever holds that paper is under no obligation to forget about you. A sale that leaves a personal guarantee in place can leave you paying for a business you no longer own.
A guarantee is a separate promise
When a company signs a lease, the company owes the rent. When you also sign a guarantee, you personally promise to pay if the company does not. The landlord or lender can then collect from your savings, your house, or whatever else you own. Many owners signed these because the landlord or the bank required it, and they were thinking about getting the doors open.
The guarantee is a different contract from the lease or loan it supports, and the sale of the business does not change it. A buyer agreeing to take over the lease does not remove your name. Only the party that holds the guarantee can release you, and that party was not at the table when you struck your deal. The landlord and the bank were not asked.
This surprises more sellers than almost anything else in the closing process. They assume the buyer "took over everything," and it turns out that the buyer took over the business and the landlord still has two names to chase.
Finding every guarantee
Before you list the business, go through your files and make a list. You are looking for more than the obvious ones.
The lease for the main location comes first, and if you have more than one location, each lease. Then the loans: a bank term loan, an SBA loan, a line of credit, and any loan from a relative or a former partner. Then the equipment, since financed equipment and leased equipment frequently carry a guarantee. Business credit cards often do. So do accounts with major suppliers, a fuel card, a vehicle lease, a merchant processing agreement, a franchise agreement, a license, and a surety bond. The utility deposit or service agreement for a larger space may have one as well.
For each, write down who holds it, the balance or remaining term, and whether it will be paid off at closing, assumed by the buyer, or left in place. The exercise takes a few hours and keeps surprises out of the schedule. Your attorney can read the guarantee language itself, which varies a great deal. Some guarantees are limited to a sum or a period. Some, often called good guy guarantees, end when you hand back the keys and give notice. Some are unlimited and last for the entire term including renewals, and some say the guarantor stays liable even if the lease is amended without telling you.
Loans are usually the easy part
Debt that is paid off at closing is the most straightforward case. The closing agent asks each lender for a payoff letter stating the amount, the daily interest, and the instructions. The payoff goes out of your proceeds, the lender confirms the loan is satisfied, releases its liens, and the guarantee ends with the debt. Ask for the written release and keep it.
When the buyer wants to assume a loan, the lender's consent is needed and that lender will want to approve the buyer's credit. Some lenders will not release the original owner, in which case you are guaranteeing the buyer's performance. The lender may agree to release you if the buyer brings enough credit or collateral, or if a new loan replaces the old one. Our post on SBA loans in acquisitions explains how the buyer's own loan will often pay off the existing debt, which settles the question.
Watch for loans that cannot be paid off cheaply. Some carry prepayment charges, and some equipment financing carries a termination fee. Those charges come out of your side of the table, and you want to know the figure when the buyer is making an offer and not at the closing table.
Leases are where owners get stuck
The lease is the hardest guarantee to resolve because the landlord holds the strongest hand. The landlord's building has a tenant that pays today, and the landlord is being asked to accept a new tenant with less history and a shorter track record. If the tenant is also releasing a guarantor with personal assets, the landlord is giving up a source of payment and getting nothing in return.
So the landlord might consent to the assignment and keep your guarantee. You then owe rent, for the rest of the term, if the buyer fails. A buyer who struggles in the second year, closes the doors, and leaves the space is a claim against you. Landlords know this, and it is why they sometimes agree to an assignment quickly. Read the consent document before you sign it, looking for the words that release you from liability going forward.
A few things are worth asking for, in roughly this order. A full release of the original tenant and the guarantor as of the assignment date. If not that, a release that applies after the buyer has paid on time for a period such as the first one or two years. If not that, a replacement guarantee from the buyer personally, or from the buyer's principals, with a larger deposit or a letter of credit to support it. If the landlord refuses all of these, a promise from the buyer to indemnify you if the landlord makes a claim. An indemnity from the buyer is only as good as the buyer's ability to pay, so it is the weakest of the options.
Time matters. A landlord who is approached early and shown the buyer's financial statements, resume, and plan for the space is more flexible than one who is handed the request two weeks before closing. Our post on the lease being part of the deal goes through how to open that conversation.
What to put in the purchase agreement
The agreement should say what happens to each guarantee. For a loan being paid off, the payoff is a closing deliverable. For anything the buyer is assuming, the agreement should list it by name and say the buyer will use best efforts to obtain your release before closing or, if the release comes later, will keep working toward it and will indemnify you in the meantime.
A buyer who refuses to put these promises in writing is telling you something about how they plan to treat the lease. Ask before closing, while you still have a say. Once you close, a buyer has less reason to chase a landlord on your behalf.
It also helps to ask for notice rights. If the buyer defaults on the lease, you want the landlord to be required to send you a copy of the notice and a short chance to cure, so that you do not learn of the problem when a lawyer calls about the arrears. A buyer who is just as interested in avoiding a default will usually agree. These details belong in the landlord's consent, which is a separate paper from the purchase agreement, so remember to ask for them there. Our post on the asset purchase agreement shows where the other pieces sit.
When the guarantee outlasts the sale
Some guarantees cannot be removed on any workable timetable. A long lease with a landlord who refuses to release anyone, for example, or a guarantee on a loan that the buyer cannot refinance. In those cases the price is the answer. You can ask for a higher price, a security deposit held by you, or a charge against the buyer's assets as protection for your exposure. Or you can weigh whether the deal is right at all. Rules vary by state, and your attorney confirms what applies to your lease and how long your obligation lasts.
If you can see the exposure before you go to market, you can plan for it. A seller who has found every guarantee, learned what each lender and landlord will require, and raised it with the buyer in the first round has a much easier closing than one who reads the guarantee for the first time during due diligence. Our post on due diligence describes what else buyers will look at.
Start this week
Pull the lease and every loan agreement and read the guarantor pages. Make the list. Ask your attorney which of them will survive a sale, then call the lender and ask what they would require to release you. Find out the prepayment amounts. If you are a year or more from selling, ask the landlord now about renewal and what they would want in a transfer, since the answer shapes what buyers will pay. Business Advisors of America can review the list with you before a buyer ever sees it.
