Legal Question in Business Law in California

Personal Guarantee vs. Deed of Trust

I may be purchasing a small business using partial seller financing, and the seller is requesting a lien on my home as collateral. That could prove problematic should I choose to sell or refinance the house prior to paying off the business loan. And actually, I do plan on moving and the sellers will be spending time in their home country after the sale...

Instead, I plan to propose a ''Personal Guarantee''. From what I can tell this may benefit them in that all my assets are fair game if I default (including the house, cars, savings, etc). Am I on track with that statement?

Thanks in advance!

Asked on 8/23/06, 7:48 pm

2 Answers from Attorneys

Ken Koenen Koenen & Tokunaga, P.C.

Re: Personal Guarantee vs. Deed of Trust

The personal guarantee would make all of you assets liable, but the loan would not be secured. If you filed bankruptcy, they might not recover, while if they had the security of the house, they would.

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Answered on 8/23/06, 8:22 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Personal Guarantee vs. Deed of Trust

Of course, if you were to collateralize the loan with your house, and then sell the house a bit later, you could then simply pay off the second (business) loan. You'd then have less net proceeds of sale, which when looked at in one way is a handicap because you have less to reinvest in another home, but in another way it's not, because there will be no business loan to weigh down your financial statement and thus you can get a bigger first on better terms for the new house.

What good is a "Personal Guarantee" to the seller/lender? When you give him your IOU (promissory note), you are, for all practical purposes, giving a "personal guarantee" whether or not there is a separate piece of paper bearing that caption. Think about it...... default, lawsuit, judgment. All your non-exempt property would be "fair game;" subject to attachment and levy anyway. You may be thinking of the "personal guarantee" that principal owners of a small corporation must frequently give to secure parties who lend to the corporation. Here, you, not the business, will be the borrower, so that concept doesn't apply.

I often represent buyers or sellers of businesses. When representing the seller, I consider it my #1 duty to my client to make sure that he's gonna get paid, "come hell or high water" as is often said in the business world. When representing the buyer, I'd advise my client to anticipate the seller taking such an attitude, to do a reality check on his willingness to "bet the ranch" on the success of the business, do his homework on the risks and prospects of the business, and then negotiate the most lenient payment and security terms possible.

Good luck!

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Answered on 8/23/06, 9:43 pm

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