The Wall Street Journal
By: Emily Maltby
August 5, 2010
Harry Clark, a serial entrepreneur from Temecula, Calif., is taking a hard-line approach these days when investors, landlords or banks ask him for a personal guarantee. He's refusing to give them one.
Mr. Clark says he learned the hard way that putting up one's personal assets--something small-business owners have long been accustomed to do, especially in the start-up phase--can lead to personal bankruptcy. Four years ago, Mr. Clark says he lost his two homes, his cars and all other personal savings when his design and construction firm, Turnkey Inc., went belly up after running into cash-flow problems.
"I got wiped out," Mr. Clark says. "I didn't think the company would just implode the way it did." Now, as he builds new companies, including Tiffany's Tools Inc., which sells toolkits to women, he's declining to put his name on the line--and so far has found it possible to secure commercial lease spaces, although piquing investor interest is still difficult.
As landlords, equipment lessors and vendors clamor for business, it's becoming easier for business owners to drop or limit their personal liability. When there's a supply-and-demand issue, "you have a better chance of negotiating," says Kenneth Marks, small-business adviser and author of "The Handbook of Financing Growth."
Even start-ups without strong credit histories can find wiggle room. John Lenzmeier, who opened a FreshBerry Frozen Yogurt Cafe franchise in Raleigh in April, realized that he would need a personal guarantee to get a five-year lease because it was his first business. But he asked the property's management company for a provision that would eliminate the guarantee after three years, as long as he pays on time each month.
"[This] mitigates my long-term financial risk," he says. After three years, "we can fold up shop and move on without the personal guarantee coming back into play."
Negotiating becomes more complicated at the bank, however, particularly in the current credit environment. "Right now in the regulatory environment that we live in ... some people who have never had to sign personal guarantees are having to," says Andy Bonner, chairman of the Tennessee Society of CPAs and chief financial officer at First Century Bank in Tazewell, Tenn.
According to Mr. Marks, there are ways business owners can protect their personal property and savings when they sign a personal guarantee at the bank. For instance, he says, they can request that a spouse not have to sign the guarantee, which would protect some joint assets. Also, owners can ask to limit, or "carve out" the liens on certain groups of assets as the company grows.
The success of these strategies will vary bank to bank. Some banks, says Mr. Bonner, won't let the spouse off the hook because the owner can then put everything in the spouse's name. But personal guarantees can become more flexible, he says, once there is a significant amount of equity in the company.
Mr. Clark regrets not asking for carve-out agreements on some of his personal assets as Turnkey became more and more profitable. It's a lesson that he plans to implement once he starts getting bank loans for Tiffany's Tools. Also, he says, he plans to look into getting personal-guarantee insurance.
Right now only one firm, Asterisk Financial Inc. of Middletown, Conn., which started taking applications five weeks ago, offers guarantee insurance. Available only after a commercial loan has been originated, the insurance would cover 50% of the guarantor's net liability, says Mark Ricciardelli, president and chief executive of Asterisk. None of Asterisk's first 25 customers have been fully processed.
Taking time to understand personal guarantees and protect personal assets takes work, Mr. Clark has learned. "You can't do it overnight," he says. "But I recommend people do it for sure."
Write to Emily Maltby at email@example.com