Protecting Your Personal Assets
I’ve been involved with starting and running businesses for more than 25 years, including launching and growing my business, Student Painters, to more than 3,000 employees. Shortly thereafter, I grew my other business, Platinum Capital, to US$1.6 billion in annual volume. Of course, all businesses require capital to get off the ground, and lenders always need to find a way to hedge the risk of extending credit.
These days, signing a personal guarantee (PG) is practically an automatic requirement from lenders. It gives your creditors the right to pursue personal assets (e.g., homes, bank accounts) if your business defaults on the loan. Over the course of my business career, I’ve taken out more than US$200 million in business loans, and every one of them required me to sign a PG. This was never a problem until Platinum Capital had significant issues during a Wall Street liquidity crisis. We then went through a period of significant financial losses, and we could not make the payments on our credit line. We defaulted on the bank loan.
Eventually, the bank called the loan, and of course, we didn’t have the money. They threatened to foreclose on the company, my personal assets and even my home. Not fun. What I learned was to never sign a personal guarantee again. It’s just too much risk! This, however, is often unrealistic, as most banks won’t give you a credit line without a PG. To help others avoid a similar painful situation, I’ve outlined some practical steps to protect not only your personal assets, but also your peace of mind:
- Manage the risk. Every entrepreneur needs to determine upfront the maximum dollar value he or she is willing and able to pay out-of-pocket, should things go south and the loan goes into default.
- Be prepared to negotiate the PG. While business owners often don’t have a lot of leverage in PG negotiations, it is important to seek the best possible agreement you can. Some key items to negotiate include:
- The amount of the PG
- A “burn-off” (i.e., a reduction in the PG over time as the loan is paid down)
- A reduction in the PG amount as your business performance improves
- A “carve-out” of some assets, such as your home
- A specific end date for the PG
- What personal financial reporting is required
- Handling “joint and several” liability. If a business has multiple partners, the entrepreneur needs to consider whether a “joint and several” guarantee is appropriate, or whether he or she should establish specific limitations on the guarantee liability for each partner. Under a “joint and several” scenario, the lender could pursue the personal assets of just one individual partner in a default for 100 percent of the liability— especially if his or her assets were more liquid than the others.
- Get insurance for the PG. This is something no one should wait on. By the time a PG is called, it’s too late— your equity may be wiped out, your business may be in default, and your personal assets aren’t protected. Personal guarantee insurance, a fairly new product offered by Asterisk Financial (www.personalguarantee.com), is something I wish was available back then. It can give entrepreneurs not only bargaining leverage, but also peace of mind.
I wish I had known this stuff back then. I would have definitely carved out my home because this created a lot of fear for my family. Finally, I would have obtained PG Insurance if it was available. We insure our homes, our building, our lives, our directors and officers and our employees for peace of mind. There’s no bigger peace of mind than going to bed at night and not worrying about a PG.
Mark Moses is founder and CEO of Mark Moses.net. He coaches high growth entrepreneurs and companies on how to grow their businesses, build their strategic plan, raise capital and navigate through the challenges of entrepreneurship. He started his first company at age 19, and has successfully built and sold two companies. Mark has won Ernst & Young’s Entrepreneur of the Year award and the Blue Chip Enterprise award for overcoming adversity. His companies garnered rankings of #1 Fastest-Growing Company in Los Angeles as well as #10 on the Inc. 500.
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