Protecting Your Personal Assets
I recently wrote an article for Entrepreneur Organization’s EO Octane Magazine that I thought was worth sharing.
I’ve been involved with starting and running businesses for 28 years, including launching and growing my 3 businesses, Student Painters, Platinum Capital and now www.ceocoachinginternational.com
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 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 other’s.
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.
About Mark Moses
Mark Moses is the Founding Partner of CEO Coaching International and the Amazon Bestselling author of Make BIG Happen. Mark has won Ernst & Young’s Entrepreneur of the Year award and the Blue Chip Enterprise award for overcoming adversity. His last company ranked #1 Fastest-Growing Company in Los Angeles as well as #10 on the Inc. 500 of fastest-growing private companies in the U.S. He has completed 12 full distance Ironman Triathlons including the Hawaii Ironman World Championship 5 times.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 67.8% during their time as a client, nearly four times the U.S. average and a revenue CAGR of 25.5%, more than twice the U.S. average.