What Exactly are You (Personally) Guaranteeing?

Posted on by JohnM

In the 1990s, President Trump nearly ruined himself by personally guaranteeing many millions of dollars in loans, and then said he regretted guaranteeing them. But it seems he has not followed his own advice. With the NY Times releasing some of his tax records and other financial information, he allegedly is personally responsible for loans totaling at least $421 million, most of which is coming due within four years.

What does all of this mean? Realize when you get a mortgage or a car loan you are signing a promissory note, guaranteeing you will pay it back. These loans have collateral so the lender can go after your house or car to help repay the debt if you don’t pay. Where it gets “sticky” is when there’s no collateral, which is rare when it’s a personal loan, other than credit cards, which don’t have collateral.

When an individual or small-business owner wants a loan they usually personally guarantee it. When the loan is to an individual, say an executive buying a business, if the loan is to the person it is a legal obligation on that person an in affect, they are guaranteeing it. If the lender makes the loan to a corporation or LLC, which most are, they ask the borrower to personally guarantee it. 

When a private equity firm or similar investment firm borrows money, the partners won’t sign a personal guarantee. The same with larger corporations. So one has to wonder why lenders asked the president to personally guarantee all the loans. Not knowing the details, I can only guess it’s because they were risky loans, there was worry about non-payment, and hiding behind the corporate veil. 

I asked my friend Greg Russell with PRK Livengood Law in Bellevue (www.prklaw.com) about personal guarantees and here are his comments:

  • He reiterated a bank will want a personal guarantee when the loan is made to an entity.
  • Business sellers will want a personal guarantee as they are unsecured creditors, coming in after any senior debt, personal home equity, etc.
  • A borrower with a personal guarantee must report it for any financial dealings and this contingent liability may impact the availability of credit.
  • A personal guarantee can hold for a long time. There is a statute of limitations of six years, which starts from the time of breach. Within this time the lender can get a judgment to keep the debt alive.

Lenders, of all types, have the most interest in personal guarantees so I discussed them with Bill Barclay, Regional Manager of Commercial Banking with Columbia Bank. Here’s what Bill had to say:

  • 95% of Columbia Bank’s loans have a personal guarantee on the borrower. He said, “If things hit the fan, we want them walking down the aisle with us.”
  • Those not having a guarantee are generally larger firms with diversified ownership and management along with private equity firms.
  • If there’s not a guarantee expect tighter loan covenants that may create a personal guarantee if triggered.
  • An existing personal guarantee (from a different lender) won’t have much impact on future credit if there’s only one. The bank will look at all contingent liabilities and multiple guarantees may require a closer look.

Conclusion

Personal guarantees are something business owners, business tenants, those of us in the buy-sell world, and others deal with all the time. Business buyers and other borrowers do their best to avoid them, but those with the money make the rules. I always come back to a client from about a dozen years ago who didn’t like what the bank was doing. He didn’t think they were creative or flexible enough. I commented to him, “The bank’s not in business to be creative or flexible, they’re in business to be paid back.” I know if I lent someone money I’d want as much security as possible. 

The Deep Dark Web and More Scary Things

Posted on by JohnM

It’s Halloween season so let’s discuss scary things. I recently took advantage of the offer from www.cyberstreams.com to have them run a free Dark Web scan. As I’m writing this, I get a weekly newsletter from Sweeney Conrad CPA firm and one of the articles is titled, “Email attacks up 667% following rise of COVID-19 worldwide.” The statistics are from (cyber) security firm Barracuda.

Obviously, the slimy bad guys (and gals) are out there and after us more than ever.

I received my Dark Web scan report and found it pretty “gentle.” Only five breaches, one from a LinkedIn breach, two from a group affiliated with a business group I’m in, and two miscellaneous ones. None got access to my passwords. So I called David Henderson with Cyberstreams to discuss it and here’s what he told me, with the first point the most important:

  • 60% of breaches are from human error. That’s right, it’s you or your employees causing most of the damage.
  • The above could be people using the same password or a variation on many different sites. For example, someone at one of their clients used (and I’m changing the word) platinum, platinum1, platinum8, and other variations. Once breached, the bad guys try variations of platinum until they get a hit.
  • When a website you use is breached, like LinkedIn, change all of your passwords.
  • Use two-factor authentication.
  • Don’t use your business email for personal matters.
  • Make sure your data is backed up and safe from ransomware (meaning, not on an external drive connected to the system all the time). Use cloud backup that’s protected from ransomware.
  • Do security awareness training (like Cyberstreams does) as well as ethical hacking (testing your people).
  • Use a password service like LastPass, and make sure your password to your service is very strong.
  • 60% of companies with major data breaches go out of business.
  • David’s company is just like yours or mine in that they get attacked all the time. He has 14 people plus past employees. His last scan found 21 accounts with data breaches (not his system but sites his people had been on) with 41 total breaches.
  • Get cyber insurance, it’s inexpensive.

The abovementioned article on phishing also pointed out how one blackmail attack was detected 1,008 times over two days and how most attacks start by a person clicking on something they shouldn’t (click on). I know every so often I get 10-12 phishing emails at the same time, with the same message. It really doesn’t matter if you’re a large firm, small firm, or an individual – they’re after you. 

“It’s so much darker when a light goes out than it would have been if it had never shone.” John Steinbeck

Businesses and Workers – It Must be Teamwork

Posted on by JohnM

Two interesting articles appeared on September 6. The Seattle Times published a Los Angeles Times article titled, “Instacart shoppers face unforgiving metrics: ‘It’s a very easy job to lose’” and American Compass released an essay titled, “Conservatives Should Ensure Workers a Seat at the Table.”

The Times article covers the harsh metrics imposed on Instacart shoppers including ongoing tracking of order filling, notices to employees via an app when they’ve earned a 10-minute break, and monitoring the words employees use with customers to make sure they use the preferred script. They offer low wages, keep employees from getting enough hours to have benefits, and drive them hard. These are the jobs people leave regularly creating turnover and training costs for employers.

The American Compass is a conservative organization so it’s a bit surprising they wrote what they did about unions, including, “Rather than cheer the demise of a once-valuable institution, conservatives should seek reform and reinvigoration of the laws that govern organizing and collective bargaining…” They make the case it’s a mutually beneficial relationship when owners, managers, and workers work together.

Compare the above to most small businesses. Talking to business buyers, I regularly hear about how they like building teams, helping employees grow, and improve. Business sellers often seem to care more about their people keeping their jobs than the price they get for the business (as in, I’ll take a little less from someone I feel I can trust to take care of my people).

Unions came about because of horrible working conditions. In my opinion, one reason they’ve lost membership is they became too rigid and too political (for private sector workers). 

It’s interesting to see how things could swing back with influence from both sides of the political spectrum. It’s also fascinating to see how some technology-based service companies (like Instacart) are returning to the employment practices reminiscent of 100 years ago.

There has to be a balance between management and workers because animosity hurts all.

“Take a rest; a field that has rested gives a better crop.” (Roman poet) Ovid

Owners Should Know What’s Going On, Shouldn’t They?

Posted on by JohnM

The September issue of the Fearey Group’s newsletter was titled PR Failure #26: The Ellen-ments of a Talk TV PR Nightmare. FYI, the Fearey Group is Seattle’s premier PR firm and you can see more at https://feareygroup.com/. I appreciate their allowing me to use an excerpt and write about it.

I’m going to tie their newsletter’s topic to small business ownership and buy-sell deals. First, here are what I consider the top two paragraphs for their newsletter.

Sitting atop the pedestal and feigning a lack of responsibility.
It’s hard to hear “Ellen” and not imagine the smiling, bright-eyed, gregarious TV host. This is by design. Everything surrounding The Ellen Show is made for you to equate the face of the brand with those qualities. The show has a merch store on its website and an offshoot video hub, known as “Ellentube.” The logo for the TV show is simply the word “ellen.” Her production company’s name? A Very Good Production. You get the picture. Like many people who make it big, as her celebrity and business grew, Ellen distanced herself from the employees who make her brand and empire function. In her July 30 letter, she stated, “As we’ve grown exponentially, I’ve not been able to stay on top of everything and relied on others to do their jobs as they knew I’d want them done. Clearly some didn’t.”
  
While this may be true, the head of any operation must stay informed about how business is done. Leadership, from the face of a brand to corporate and organizational executives and CEOs, must recognize their culpability in issues that arise and act swiftly and tangibly to rectify missteps. Hopefully, that’s before the issues go public and become a total PR failure. The words of one of the brave employees who came forward have never rung more true as an example for us all: “If [Ellen] wants to have her own show and have her name on the show title, she needs to be more involved to see what’s going on.”

I think the most important line in the above excerpts is, “While this may be true, the head of any operation must stay informed about how business is done.” Here are three ways not paying attention can manifest itself.

Follow the leader – Businesses rely on their reputation. From what the boss does to what the lowest level employees do. When the employees see the owner/boss cutting corners, not carrying about details, or going through the motions, they will also. They will emulate the pride the owner takes in his business. And it will show with quality, customer relations, and the culture. The employees will push the limits, like on Ellen. In my books I tell the story of visiting a company and seeing the employees eating lunch in their cars. Walking in my first impression was, “they don’t care.” It was a dirty mess, and the lunchroom was worse. No wonder people ate outside. Impressions like this do not increase the value of any business.

Can’t see the forest for the trees – This is the opposite of the previous point. This is when the owner is overly involved, won’t delegate, and micro-manage everybody and everything. It’s known as an owner dependency and it means there’s a lot of personal (owner) goodwill versus company goodwill. Recently we were calling one of our client’s customers to get a feel for how they thought of the company. One area of concern was the customers related more to the owner than to the company. This proved to be false, which is great.

I know nothing – Did you know, at least as of a year ago, the most popular TV show in its time period was Hogan’s Heroes (this from a friend who sells TV advertising)? The “I know nothing” line is from that show and it sure is apropos to the Fearey Group’s example, isn’t it? It also comes into play in buy-sell deals when the seller is asked to represent and warranty that everything they told the buyer is true and correct. All of a sudden the owner who brags at her club about how important she is to the business and says it would fail if she wasn’t around now wants to qualify it (at the urging of her attorney in most cases) by saying “to the best of my knowledge” all I’ve shared is true and correct. Let’s face it, there are a lot more owners described in the second example than the first and they can’t claim they don’t know what’s going on. My experience tells me 90% or more of owners know even the most minute details about what’s going on from customer status, to operations, to margins, to the employees. 

Conclusion

The above is why companies should have a board of directors or at least an advisory board. This can keep the owner/CEO from straying or from ignoring things. Healthy tension should be the relationship between board and owner/CEO. Not like what’s been reported about the Boeing board. Boeing was just hit with a lawsuit saying the board of directors was lax on their oversight of the 737 Max issue. Management knew what was going on (supposedly) but weren’t held accountable. This has elements of all three examples above.

Passion and Emotions Win the Battle

Posted on by JohnM

I’ve been really into the Murder Book Podcast by Michael Connelly, author of over 30 mysteries and executive producer of the great series, “Bosch.” The podcast is about a 30-year-old murder that’s finally brought to trial, is filled with interviews with key people, wiretap recordings, and courtroom recordings.

Listening to the closing arguments, I was struck by three things and how those things can benefit all of us:

  • Passion was oozing from both the defense attorney and the prosecutor. There was no doubt about what they wanted, how much they wanted it, and what they would do to convince the jury, even if it meant stepping over the line and getting admonished by the judge. In business it should be obvious to everybody how much we like (love) helping our customers/clients.
  • This wasn’t TV where all the actors are good. This was real life and the defense attorney was a soooooo much better presenter than the prosecutor it was ridiculous. The defense attorney  sounded like a high-quality professional speaker. When listening to the prosecutor you hear a lot of “ah,” “um,” and “like.” It reinforces why we should know what we’re saying so we sound like an expert not someone making it up on the fly.
  • The emotional tug at the jury was based on facts. They both pulled facts from the case, added influence to them, and strove towards a compelling argument. In other words, they were like a good salesperson pointing out why what they have solves the customer’s problem (after asking questions to determine what is the actual problem).

To summarize, passion, presentation skills, and fact-based emotion will help all of us.

“Inviting people to laugh at your while you are laughing at yourself is a good thing to do. You may be the fool, but you are the fool in charge.” Carl Reiner

Time Change – Life Change

Posted on by JohnM

Our dogs have been affected ed by the change from Daylight Savings to Standard Time. They get up at the same “time” in the morning, but the clock says it’s an hour earlier, so we get up earlier also.

Change is tough for a lot of us, people and dogs. Change of a job, home, school, and especially when it comes to business ownership. It’s why I tell people half of what I do falls into the intangible’s category, because we deal with big change.

One client told me the ability to share his thoughts and questions with someone on a peer level was the most important part of our relationship. Knowing the right questions to ask and the right answers to get is what most of us want.

The buying or selling of a business is often the biggest life-changing and financial change for business buyers and owners/sellers. An experienced guide with a proven plan adds a lot of value (whether my firm or another reputable firm).

When City Slickers Go Camping

Posted on by JohnM

I was reminded of the Billy Crystal movie City Slickers when I saw the following, which would be funny if these people weren’t damaging our planet:

  • A Seattle Times article on how the Cascade wilderness areas are being trashed (organic and inorganic waste) by city people deciding to get outdoors during the pandemic but not knowing how to act (as in, carry out their waste).
  • A neighbor who loves the isolated outdoors said a deep-woods campground that usually has half of their 30 campsites available was filled with large RVs the last time he went there.
  • A recent Wall Street Journal human interest article about city dwellers experiences in the outdoors. The two best stories are about the young lady who didn’t bring a sleeping bag because it was hot out, camped in a valley, and said she had never been so cold in her life and another lady who was appalled by campsite restrooms (an outhouse I’m assuming) and drove over a mile to a gas station to relieve herself.

So what does this have to do with business? The analogy is there are a lot of people who get into business with the same amount of preparation as the city slickers described above. I get calls regularly from people wanting to get into business (often starting one) and it’s usually to create a job using their skills versus growing a business (I refer these people to the local SBA/SCORE office so they can get a mentor and counseling). 

Advice: 

  • Know why you want to do what you’re going to do.
  • Get the right help to succeed.
  • Realize getting into business (or exiting) isn’t easy. 
  • Plan.
  • Make a decision; analysis paralysis doesn’t help anybody.

Things always look better and easier from the outside. Just like, “the grass is always greener on the other side.” It’s only looks easy, better, or greener when you don’t do the things you’re supposed to do and do them correctly. Doing it the right way takes more time and effort, and it’s worth it.

“If You Don’t Have Time to Do It Right, When Will You Have Time to Do It Over” John Wooden

Lowest Common Denominator

Posted on by JohnM

Realize what I give as examples below represents at least part of our customer/client base, which is why we can’t assume too much about people, good or bad – too many people just don’t pay attention. It’s also why my wife proofreads my memos and newsletters; because if I start using industry jargon and she doesn’t understand it I know I have to change the language so all readers will get my points, not just those in my industry.

On September 15 I was watching the NBC Nightly News while working out. They did an imitation Jay Leno bit with “people on the street” interviews. The question was, “How many people in the US have died of COVID-19 so far?” The answer is below; see if you know it without cheating, using Google, or asking someone.  Here are three of the answers:

  • Close to 100,000.
  • Tens of thousands.
  • They said it was 100,000 but took that back and it’s about 1,900.

A couple days later I had a routine doctor’s appointment and got to talking to the nurse. I asked if her hands got dried out because she was putting on sanitizer every few minutes. She said, yes, they do, we try to be careful, and then shared a story about a patient. She also works in the ICU and said the guy, with heart issues and diabetes, went to Sturgis, had a good time, came home with COVID, gave it to his neighbor, ended up in the ICU, and died.

Look, for everybody like those mentioned above there are at least an equal number who know what the heck is going on and what to do. The problem is, you can’t automatically tell the two types apart until you engage in a dialogue, ask questions, and get to know them. When you get to know them you build trust and a relationship, which is when a win-win arrangement is achieved.

“There are three sides to every story: you side, my side, and the truth.” Robert Evans

I Didn’t Sign Up for This

Posted on by JohnM

We’re doing online training with our adorable puppy Coco and it reinforces our feelings we lucked out and got a great dog. We see and hear the other dogs and their owners on the training and feel fortunate.

One lady was quite frustrated with her puppy and said, “This is not what I signed up for.” My guess is she got a puppy, like a lot of people got dogs, because of the Covid pandemic. I’d bet she thought a puppy/dog would be like her cats (she referenced her cats).

As mentioned, our puppy is very well behaved and I don’t think it’s just luck, or us. One of the trainers we interviewed asked a few questions about our household, the puppy, and our other dog, Dobre, an 11-year-old Lab mix. She said Coco is emulating the older dog, who is laidback. She even emulates him when it comes to chasing tennis balls, which is a lot of fun when they chase the same ball.

A puppy learning from an older dog is like life; it’s great to have a mentor/coach/advisor. It speeds up the learning process and allows us to be more efficient. The most important aspect is having a coach or mentor is to have them to point out what not to do. Been there – done that is a powerful teaching tool.

And while I advise and coach clients, I’m not referring to only business situations. A business owner should be mentoring their employees, helping them grow, even if they grow out of the job. Parents nurture their kids to make them productive adults. Coaches help athletes, dancers, actors, musicians, and more. 

Get someone to help when you need it. Be that help when you can.

“In politics, stupidity is not a handicap.” Napoleon Bonaparte