Business Buying Pitfalls: Should You Sign a Personal Guarantee on a Lease?

When you buy a business it usually comes with a lease already in place.

If the lease is not coming due shortly the seller tells you to assume and qualify for the lease. They think this gets them off the hook, but it doesn’t. The seller then becomes a guarantor of the lease in case the buyer defaults. Only if a new lease is written is the seller fully off the hook and the buyer can negotiate new terms and conditions with the landlord.

It is in the buyer’s best interest to negotiate a new lease with terms and conditions acceptable to the buyer.

Read more to find out more about leases and buying a business.

A lease is the most important part of buying a business; treat it as such. The danger in leases is if your business goes belly up, the landlord will sue the new business owner for rent payments. After losing all of your investment in a business, it is not desirable to be caught again with lease payments. What do you do?

First, in order to keep the landlord locked in to the deal but you (the buyer) with lots of flexibility, you need to write short leases with many options.

For example: A two-year lease and 4 options of 2 years each. Then you are only committed two years at a time, but the landlord is locked up for the full 10 years.

The second option is to buy the business through a corporation or LLC and sign the lease under the corporation’s name only.

Refuse to personally guarantee the lease, so that if everything goes belly up, the corporation is closed and the landlord cannot come after you personally.

Landlords will refuse to lease without a personal guarantee but business buyers can also refuse. The question becomes who backs down? Until you complete a business purchase you hold most of the cards. After the deal is done, you hold no cards. Play your cards while you have the upper hand.

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