5 Tips to Avoid Putting Your Personal Assets at Risk
By Erica Pero
Have you ever been asked to sign a personal guarantee for something business-related? Lenders and Landlords (a.k.a. “creditors”) frequently require business owners (“debtors”) to sign a personal guarantee before lending money or leasing commercial property. I totally understand why creditors require such a commitment, as new businesses are inherent risks. As doctors and business owners, however, my clients are usually pretty attractive risks; they make lots of money, and they’re usually really smart people. BUT – and it’s a big one – just because you’re smart doesn’t mean you don’t need to review the paperwork VERY CAREFULLY. Here are five tips that will help you protect your personal assets from a personal guarantee:
1 “But I’m NOT a ‘new’ business!!” If your practice/business is already fairly well-established, you might be able to avoid a personal guarantee. If you can prove you’re a trustworthy ongoing operation, you might be able to shed the personal guarantee altogether. Flashing last year’s balance sheet might be enough if there’s substantive profit.
2 How ‘bout THIS collateral?? If you can’t convince the Landlord that you’re already a successful business, request that your business assets serve as collateral rather than your personal assets. If your business goes to sh!t, you will lose your X-ray machine, but that’s better than your house, right? A word of caution here: make sure that you’re not breaking a promise to another creditor by pledging your business assets as collateral.
3 You mean for the whole time? If you have a five-year lease, the Landlord will often require a five-year guarantee. Consider asking for a shorter time period for your personal guarantee. For example, if you have a 10-year lease, consider negotiating a five-year personal guarantee. After five years, you should be able to prove that you’re a worthy credit risk, and if all goes well, your business will have enough collateral to get your personal assets off the hook.
4 Default, schmee-fault. Many times, a contract defines “default” as a myriad of events, such as non-payment, vacancy, bankruptcy, etc. – which makes a lot of sense. However, the definition of default regularly includes a phrase that often sounds something like, “If creditor feels that debtor is in breach or threatens breach of this agreement, debtor is in default.” Um, could you be any more vague?!? This wording is problematic even when there isn’t a personal guarantee, but this kind of leeway COUPLED with a personal guarantee is like a super-highway to your personal assets. Make sure to tighten up the language so “default” is clearly defined and can be objectively measured.
5 JSL baby, JSL. Most contracts and personal guarantees use the phrase “Joint and Several Liability” (JSL), which is a fancy way of saying that the creditor doesn’t have to pick who to sue. If you signed a personal guarantee the creditor can sue you AND your business at the same time. Make sure there is language in your contract that requires the creditor to sue the business first before proceeding against you personally to enforce the personal guarantee.
If you’re ever asked to sign a personal guarantee, make sure to read everything thoroughly. (And if you find the paperwork incredibly confusing, find a great healthcare attorney who LIKES to read through this kind of stuff who can explain the terms, negotiate on your behalf, and minimize the reach of the personal guarantee!!)
Erica Pero, an attorney with Pero Law, focuses her practice on health law. She helps healthcare professionals navigate the complexities of running a business in today’s healthcare industry. Pero Law is a lean law firm committed to excellent customer service and exceptional legal representation. perolaw.com