No risk, no reward 🦋

Top on the list of New Business Misconceptions is “you should never sign a personal guaranty.” It sits right up there with “I can’t make a budget until I find the space” and “I won’t need to pull permits.” The personal guaranty has a bad reputation partly because it is, in fact, a little scary; but for small businesses, it’s incredibly common and often inevitable, no matter what the local celeb chef told you in between bench presses.

⚖️ Quick reminder here — although Abby grew up with two attorneys as parents, and I’m deeply familiar with the South Carolina justice system thanks to the Murdaugh Murders Podcast, we’re not actually attorneys, and this is not legal advice. 

Okay, consider this:

🥩 When Dio and Dave are ready to sign a lease for their specialty meat shop “D’s Meat Boutique,” their business entity More Meat LLC will be the tenant on the lease, and the guys will sign their names on the document as owners of the LLC. 

🩸 The LLC protects Dio and Dave from being held personally responsible in the event of an unfortunate sausage making incident, but it does not protect them from being held personally responsible for their lease obligations, because they had to personally guaranty their lease.* In other words, they had to promise the landlord that, as the owners of the business, they’d make good on the terms of the lease even if the business couldn’t. 

Why would a landlord require such a promise? Is the landlord a pescatarian named Faith who has literally never eaten fast food in her entire life and might have a thing against meat? Usually not. The landlord knows that new businesses are risky, and in order to get comfortable, they need to know that the business owner stands firmly behind the lease — a long term promise to pay rent and to be a good tenant. 

👶 Our favorite way to explain this concept is “Baby with a Credit Card.”  A brand new business is like a baby in that it exists and has a social security number, but no credit history. No experience. No maturity. No teeth. No clear ability to pay its debts. 

But you know who does have all that? The baby’s parents – the grown adults who made the baby. Until the baby can prove that it has as much if not more financial stability than its parents, it’ll need its parents to agree to support it.

Small retail businesses can take a looooong time before reaching maturity – the point when the business alone has the cash flow, the assets, and the credit history to clearly demonstrate its ability to financially support opening and operating a new brick and mortar business come rain or shine.

So here’s why people can get comfortable with the personal guaranty:

🥯 You have to risk it for the biscuit.


You can’t open a retail business without taking on risk. But risk is not danger…it’s exposure to danger. You’re venturing into the unknown with a new concept, new products, new customers, and you cannot guarantee that you’ll get your money back.

Of course you don’t know what the future holds, but if you want to actually open that business, your confidence in your plan (and yourself) has to be BIGGER than your fear of it not working out the way you hoped. Even with a solid plan, you can’t be certain that the universe won’t mess it up…so you have to have a lot of courage, too.

⏳ You can (usually) negotiate a limited guaranty


Almost certainly, landlords come out of the gate asking for a full guaranty – meaning that you’d be on the hook for the lease for its entire initial term…all five or ten years of it. But in our experience, they’re usually willing to accept a “limited guaranty,” which is exactly what it sounds like. Since a personal guaranty puts a dollar figure on your maximum financial exposure (put more crudely, the amount a landlord can sue you for), a limited guaranty caps it. 

A good tenant broker will always try to limit your personal guaranty. At Pedal, our ideal scenario is a “12 month rolling guaranty,” which, like it sounds, limits your exposure to the 12 months from when you pull the plug (or the plug is pulled for you). In many cases, the best we can get is 24 months rolling, but that’s still way less than the entire lease term.

But there’s another really critical piece to understand…

🔑 IF the sausage hits the fan, you don’t wake up one day to your landlord demanding your house keys. 

The road to lease default is usually loooooong. Both you and your landlord see it coming, so there’s time to maneuver. Typically you’re having conversations and seeing if you can work things out, you might get some rent relief, and you’ve got time to consult attorneys. 

Everyone (you and your landlord) shares the same goal – to limit their financial suffering. Ideally, there’s a way to keep you afloat long enough to weather the storms, but if there’s not, everyone just wants to minimize the pain of exiting.

Remember, property owners are business owners, too. Oftentimes they have mortgages on their properties and rely on rental income as their source of revenue. So it’s in their interest to get right to work finding a new tenant to take your space. And while landlords can’t double dip (collecting your rent and a new tenant’s rent), re-letting the space to a new tenant takes a long time.

It’s important to know that landlords aren’t out to punish you. Unlike plaintiff’s attorneys in Hampton County, South Carolina, no one is trying to get rich on punitive damages. And unlike the Murdaughs, no one really likes to go to court. So if there’s a settlement amount that allows both you and your landlord to avoid court, that’s often the preferred exit route.

☠️ And perhaps most importantly…you won’t die. 

I know this to be true from personal experience. 

Yes, there is a lot of money lost and a lot of collateral damage. But there’s no debtor’s prison, and as long as you don’t do crimes, no real prison either.

Yes, the crushing fear of public failure is real. I remember lying in bed the night before my partner and I had to tell our staff and customers that we were closing. I felt afraid of what “everyone” was going to think of me for “failing.” 

💡 Then in a true moment of clarity, I realized that “everyone” is consumed by their own fears and problems, and that my “failure” was way, way braver and cooler than anything most “everyone” attempts. In fact, it wasn’t a failure at all. I had achieved something none of my peers had; I’d opened, operated, and closed a business all while they were punching clocks for the man, so to speak. 

❤️‍🩹 Ultimately, you can’t take money with you when you die, the people who love you will still love you, and everyone else doesn’t matter.

So there you go.
 

* Before you argue with me, yes, it is possible to sign a lease without a personal guaranty — the most common alternative is a very large security deposit (typically to the tune of at least $50k, though we’ve seen as high as $250K).