Personal Guarantees in Business Sales: What Every Seller Needs to Know
Selling a business is an exciting milestone, but many business owners overlook one important issue that can create significant financial risk long after the sale has closed: personal guarantees.
Whether your business operates from leased premises, has bank financing, or is part of a franchise system, you may have personally guaranteed the company's obligations. Unless those guarantees are properly released, you could remain personally liable even after you no longer own the business.
What Is a Personal Guarantee?
A personal guarantee is a contractual promise by an individual to be personally responsible for a company's obligations if the company fails to meet them.
Personal guarantees are commonly required for:
Commercial leases
Bank loans and operating lines of credit
Equipment financing
Supplier or trade credit accounts
Franchise agreements
Although the business is the primary borrower or tenant, the guarantee gives the creditor the right to pursue the individual if the business defaults.
Selling Your Business Does Not Automatically Release You
One of the most common misconceptions is that selling a business automatically ends all personal obligations.
It does not.
Even if the purchaser assumes the lease, financing, or other contractual obligations, your personal guarantee will often remain in effect unless the creditor expressly releases you in writing.
Without that written release, you may still be responsible if the new owner later defaults.
A Common Business Sale Scenario Involving a Personal Guarantee
Imagine you own a restaurant that operates under a commercial lease. When you signed the lease, you also signed a personal guarantee.
Several years later, you sell the business. The purchaser takes over operations and begins paying rent.
Everything appears to be complete.
However, two years later, the purchaser stops paying rent and abandons the premises.
If your guarantee was never released, or if the landlord merely consented to an assignment of the lease without releasing your guarantee, the landlord may still have the right to pursue you personally for unpaid rent, damages, legal fees, and other amounts owing.
The same concern can arise with bank loans, franchise obligations or equipment financing.
Risks of Remaining on a Personal Guarantee
Failing to obtain a proper release can expose a seller to significant financial consequences, including:
Liability for debts incurred after the sale;
Claims for unpaid rent or loan balances;
Legal costs associated with enforcing the guarantee;
Damage to personal credit; and
Exposure of personal assets, including investments and real property, to enforcement proceedings.
These risks can continue for years after closing if the guarantee remains in place.
How Sellers Can Protect Themselves
Before closing any business sale, sellers should carefully identify every personal guarantee they have signed.
Important steps include:
Review all leases, loan agreements, franchise agreements, and financing documents.
Request written releases from landlords, lenders, franchisors, and other creditors.
Make those releases a condition of closing whenever possible.
Ensure the purchaser provides replacement guarantees if required.
Confirm in writing that the purchaser has assumed the applicable obligations under the purchase agreement.
A verbal assurance that "everything will transfer" is generally not enough.
What Should Be Included in the Purchase Agreement?
A well-drafted purchase agreement should address personal guarantees directly. Depending on the transaction, it may include provisions requiring:
The purchaser to use reasonable efforts to obtain releases;
Closing to be conditional upon obtaining specified releases;
The purchaser to indemnify the seller if claims arise after closing;
Requiring the purchaser to continue using commercially reasonable efforts to obtain outstanding releases after closing, if they cannot be obtained before closing; and
Both parties to cooperate with lenders, landlords, and franchisors to complete any required documentation.
While an indemnity may allow the seller to recover losses from the purchaser, it does not prevent a creditor from enforcing an existing personal guarantee.
A Closing Checklist for Sellers
Before completing the sale of your business, consider the following:
Review every document that contains a personal guarantee.
Confirm whether a written release is required.
Obtain landlord, lender, or franchisor consent where necessary.
Ensure replacement guarantees have been executed by the purchaser, if required.
Keep copies of all releases with your closing documents.
Confirm whether any guarantees survive amendments, renewals or extensions of existing agreements.
Why Working with a Commercial Lawyer in Edmonton Can Protect Your Business Sale
One of the objectives of a properly structured business sale is to ensure that the seller does not remain responsible for ongoing business liabilities.
Too often, sellers focus on negotiating the purchase price while overlooking personal guarantees that may continue long after closing. Taking the time to identify these obligations and obtain proper written releases can prevent costly disputes and provide peace of mind once the transaction is complete. In some cases, a creditor may refuse to release the seller until it has completed its own credit review of the purchaser or received replacement security. Because these approvals can take time, personal guarantees should be addressed early in the transaction rather than left until immediately before closing.
Whether the transaction is structured as an asset sale or a share sale can also affect how personal guarantees are addressed. Although guarantees commonly arise in both types of transactions, the steps required to obtain releases and third-party consents may differ. Legal advice early in the transaction can help identify these issues before closing.
Planning to sell your business? Our commercial lawyers in Edmonton provide practical legal guidance for business sales, purchase agreements, and related commercial transactions. Contact SB LLP to discuss your business sale and help ensure personal guarantees and other ongoing liabilities are properly addressed before closing.
