loan guarantor for business purchase advice please.

[StuntmanMike]

I have been approached by a close friend to be his guarantor on a loan, he needs 125000 to purchase a share in a company he has worked as an employee for a few years.
My only asset is my house, this is purely a pension for me, and an inheritance for my children, therefore I will politely decline.
My question is, why does he need a guarantor? Is this usual practice or does it mean that he or the company are deemed a bad risk.
Cheers Chris.

[hajaba123]

Lenders try to get as much as they can out of the deal, the borrower will have tried to give away as little as possible. Like most things it will have been down to how the deal was negotiated.

Does seem a bit of a strange arrangement though, especially if the money is being borrowed to finance a business that you have no interest in

[anonymous-user]

hajaba123 said:

Lenders try to get as much as they can out of the deal, the borrower will have tried to give away as little as possible. Like most things it will have been down to how the deal was negotiated.

Does seem a bit of a strange arrangement though, especially if the money is being borrowed to finance a business that you have no interest in

What is he offering to the guarantor in return for them shouldering the risk?

[johnfm]

Run away.

And your mate needs a word in the ear - asking someone else to risk their house is just ridiculous.

[StuntmanMike]

johnfm said:

Run away.

And your mate needs a word in the ear - asking someone else to risk their house is just ridiculous.

This, I trust to have a key to my house, I trust him with my kids, but I would not go into any sort of partnership with him, I know him to well, I'm a bit annoyed that he has put me in this situation to be honest, thanks for all replies.

[JustinP1]

StuntmanMike said:

johnfm said:

Run away.

And your mate needs a word in the ear - asking someone else to risk their house is just ridiculous.

This, I trust to have a key to my house, I trust him with my kids, but I would not go into any sort of partnership with him, I know him to well, I'm a bit annoyed that he has put me in this situation to be honest, thanks for all replies.

Indeed.

Him getting a profit from the business is relative to his investment. Ergo, if you invest double, you get double the profit as you have double the risk of loss.

If someone else guarantors that loan, then effectively it is the guarantor that has the risk, whilst the investor gets the profit.

Not the fairest scenario here...!

I'd be somewhat annoyed if this were asked of me too.

[Frimley111R]

So he wants to buy into his company with £125,000 and has asked you a guarantee his loan to do so so that if it goes horribly wrong you can bail him out by selling your house? Seems fine to me ...

[johnfm]

If he cannot get finance without a guarantor - but knows a lot about the business and the seller knows him well etc they need to re-structure the deal so that it is vendor financed.

[PugwasHDJ80]

johnfm said:

If he cannot get finance without a guarantor - but knows a lot about the business and the seller knows him well etc they need to re-structure the deal so that it is vendor financed.

indeed

you'd have though that the inability to complete a vendor backed transaction would suggest that the balance sheet is weak, which wouldn't fill me with confidence if I was guaranteeing anything.

If he is part of a MBO then this would (and should) be backed by a number of different debt/equity provisions.

My biggest concern, and one you should have for your friend, is that he doesn't seem to have very good advice here.

[hajaba123]

PugwasHDJ80 said:

johnfm said:

If he cannot get finance without a guarantor - but knows a lot about the business and the seller knows him well etc they need to re-structure the deal so that it is vendor financed.

indeed

you'd have though that the inability to complete a vendor backed transaction would suggest that the balance sheet is weak, which wouldn't fill me with confidence if I was guaranteeing anything.

If he is part of a MBO then this would (and should) be backed by a number of different debt/equity provisions.

My biggest concern, and one you should have for your friend, is that he doesn't seem to have very good advice here.

Or it's too small/the parties are not prepared to pay for proper advice and structure

[therealpigdog]

hajaba123 said:

Or it's too small/the parties are not prepared to pay for proper advice and structure

£125k should be big enough though!

I'd take John's advice and run for the hills.

[PugwasHDJ80]

hajaba123 said:

PugwasHDJ80 said:

johnfm said:

If he cannot get finance without a guarantor - but knows a lot about the business and the seller knows him well etc they need to re-structure the deal so that it is vendor financed.

indeed

you'd have though that the inability to complete a vendor backed transaction would suggest that the balance sheet is weak, which wouldn't fill me with confidence if I was guaranteeing anything.

If he is part of a MBO then this would (and should) be backed by a number of different debt/equity provisions.

My biggest concern, and one you should have for your friend, is that he doesn't seem to have very good advice here.

Or it's too small/the parties are not prepared to pay for proper advice and structure

Proper advice could cost no more than 10-20k, far cheaper than risking 125k

[2 sMoKiN bArReLs]

Friendship is one thing, gambling at this scale is another.

[hajaba123]

PugwasHDJ80 said:

Proper advice could cost no more than 10-20k, far cheaper than risking 125k

Agreed but I know that lots of smaller businesses don't bother with getting proper advice for these sorts of transactions

[Pit Pony]

Lets do some basic risk assessment.

List all the reasons why you might loose some or all of your money.

I.E. the reasons why he might fail to repay the loan.

Death, Injury, Sacking (just because he's a shareholder doesn't mean they have to pay him a salary, and they might not make a profit), the business fails, he 'disappears' to another country in a canoe.

Then list what the impact might be. You loose all the money, plus the interest? A bad man comes to your house murders you and rapes your dog or vice versa (only if he's borrowing off the mafia)

Then score the impact. 10 is death, 8 is you loose your house, 7 is you end up financing the loan out of your own money, 3 you wouldn't notice the loss, as it's a drop in the ocean, but you'd be a bit cross. 1 is there is no loss, (because you don't lend it)

Then score the likely hood of each occurrence happening. 10 it will happen, 1 it won't, 5 it's a strong possibility, 8 it's happened before to him, but he's learnt

Then ask: is there anything I can do to mitigate the problem. so Death. you could take out life insurance on him.

score that 1 if the mitigation would definitely work and 10 if there is no mitigation at all
5 if it might just work.

Now multiple the 3 numbers together

Lets do one. The business fails. Impact. He can't service the loan, you can't service the loan, you loose the house 8. Likelyhood ? 5? Anything you or he can do to stop this happening ? You might be able to borrow the money off a family member, but would that work ? 5 so that's a score of 8 x 5 x 5 = 200 Anything above 50, don't fking do it.

Or do a fault tree, with and/or gates.

Basically, you would actually be better off buying the single share, and at least then you might make a dividend out of your risk.

My uncle was in a similar situation in the late 70's when he was offered a junior partnership in his firm for £40K. The bank wanted 40% interest, and his dad refused to find it in his savings, so he sold his house, and bought a cheap stty car, and a smaller house, which got him £20K, and then borrowed the rest as an unsecured loan. Which took him 10 years to pay off. Still when they went plc, in the mid 80's he made 1 million converting 1/2 his partnership into cash.

[MrSparks]

Pit Pony said:

Lets do some basic risk assessment.

List all the reasons why you might loose some or all of your money.

I.E. the reasons why he might fail to repay the loan.

Death, Injury, Sacking (just because he's a shareholder doesn't mean they have to pay him a salary, and they might not make a profit), the business fails, he 'disappears' to another country in a canoe.

Then list what the impact might be. You loose all the money, plus the interest? A bad man comes to your house murders you and rapes your dog or vice versa (only if he's borrowing off the mafia)

Then score the impact. 10 is death, 8 is you loose your house, 7 is you end up financing the loan out of your own money, 3 you wouldn't notice the loss, as it's a drop in the ocean, but you'd be a bit cross. 1 is there is no loss, (because you don't lend it)

Then score the likely hood of each occurrence happening. 10 it will happen, 1 it won't, 5 it's a strong possibility, 8 it's happened before to him, but he's learnt

Then ask: is there anything I can do to mitigate the problem. so Death. you could take out life insurance on him.

score that 1 if the mitigation would definitely work and 10 if there is no mitigation at all
5 if it might just work.

Now multiple the 3 numbers together

Lets do one. The business fails. Impact. He can't service the loan, you can't service the loan, you loose the house 8. Likelyhood ? 5? Anything you or he can do to stop this happening ? You might be able to borrow the money off a family member, but would that work ? 5 so that's a score of 8 x 5 x 5 = 200 Anything above 50, don't fking do it.

I wish I thought of this risk assessment approach when I did my first "investment" nearly lost £6k (not a lot, but it was to me at the time) to a volkswagen camper refurb "company". Luckily I got the majority of my money back as I was quite good at selling all the stuff from his unit when he fked off. He wouldn't have scored well on this risk assessment approach.

OP, it's worse when it's friends/family asking you! Sometimes you feel more compelled to do it and don't weigh up the risks properly (as per the above!) good decision not to do it.