On The Hook: What Dental Practice Owners Need to Consider Before Signing a Personal Guarantee

Any dental practice owner who has sought a loan or other financing for their practice knows that there are a lot of papers to sign as part of the process. Some of these documents fly by with the stroke of a pen and little thought given. But if one of those signatures goes on a personal guarantee, the implications, not only for the practice’s financial future but for the owner’s as well, are enormous. 

While being asked to sign a personal guarantee can feel like a routine part of obtaining a practice acquisition loan, equipment financing, real estate loan, line of credit, lease, or other business obligation, dental practice owners should understand exactly what they are guaranteeing, how much they could owe, what assets may be exposed, and what happens if the practice cannot meet its obligations.

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The Basics of a Personal Guarantee

A personal guarantee is exactly what its name implies: a guarantee by the person behind a business that they will be responsible for the business’s obligations if specified conditions occur. The most common and prominent of those conditions is a default on the loan by the business.

For example, suppose a dental practice borrows $1 million through a practice acquisition loan. The named borrower may be a professional corporation formed by the owner. If the lender also requires the owner to sign a personal guarantee, the lender may have rights against the owner's personal assets – their bank accounts, their home, their investments - if the practice fails to satisfy the guaranteed obligations.

The practical effect of a personal guarantee is that it destroys the liability protection otherwise provided by the business entity. Without a guarantee, a lender’s collection efforts upon default would be limited to the entity’s assets (presuming there weren’t independent grounds for “piercing the corporate veil”). Once that signature goes on a guarantee, however, it is essentially open season on the owner’s personal assets. 

Don't Assume the Guarantee Is Limited to the Loan Principal

Owners sometimes focus on the amount originally borrowed without considering the other obligations covered by the guarantee. Depending on the language, the guaranteed obligations could potentially include principal, accrued interest, late charges, collection costs, attorneys' fees, and other amounts owed under the underlying agreement.

Some guarantees are "limited" to a specific dollar amount or percentage of the debt. Others may be described as "continuing" or "unlimited." Those distinctions can have substantial financial consequences. Accordingly, owners should understand the following details before signing a guarantee:

• The maximum amount of potential liability.
• Whether interest and fees are included.
• Whether attorneys' fees and collection costs are covered.
• Whether the guarantee applies to future advances or additional obligations.
• When the guarantee begins and when it ends.
• Whether the guarantee remains effective after a refinancing, amendment, renewal, or restructuring.

“Continuing” Guarantees Can Extend Personal Liability Indefinitely

Guarantors need to understand that their obligations and potential liability may not necessarily disappear when the original loan is paid down or modified. For example, a continuing guarantee might apply to obligations arising under a revolving line of credit or to future extensions of credit. Depending on the agreement, an owner's guarantee could continue even as the business relationship with the lender changes. This is particularly important when a dental practice has multiple financing arrangements with the same lender.

What Are the Defaults and Conditions That Trigger the Guarantee?

Once signed, a personal guarantee can largely remain out of sight and out of mind —until something goes wrong.

What that “something” is may be defined in the underlying loan, lease, or financing agreement, not just in the guarantee itself. Determine what constitutes a default and whether the lender can accelerate the entire balance after a default. Also, examine notice and cure provisions.

Why You Should Consult With an Attorney Before Signing a Personal Guarantee

Since the lender holds the money, they also hold most of the cards when it comes to the terms of a personal guarantee. But that does not necessarily mean that those terms are non-negotiable. A skilled attorney may be able to help a practice owner modify a proposed guarantee to reduce the potential downsides for the owner upon default or another triggering event. Depending on the transaction and the lender, an attorney may be able to negotiate:

•  A dollar cap on liability.
• A declining guarantee as the loan balance decreases.
• A specific expiration date.
• Release of the guarantee after certain financial milestones.
• Exclusion of future advances.
• Limits on attorneys' fees or other costs.
• Release upon sale of the practice or a change in ownership.
• Different treatment if the lender modifies the loan without the guarantor's consent.

An attorney can also review the guarantee alongside the underlying loan or financing documents to identify provisions that may create unexpected personal exposure.

Just because a personal guarantee may be a reasonable or necessary part of financing a dental practice does not mean sign on the dotted line without question, or without the advice of counsel. A personal guarantee is a significant legal and financial commitment. Treat it accordingly.

At Grogan, Hesse & Uditsky, we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.

Please call ddslawyers.com at (630) 833-5533 or contact us online to arrange for your complimentary initial consultation.

Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices, and this blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.