Understanding Your Risks Under a Personal Guarantee

Posted on April 30, 2013 by Megadox

If you’re looking for a credit facility for your business, be prepared to give a personal guarantee. There is almost no lender today that does not require personal guarantees from the principals of the business as security, especially from small to medium-sized businesses. Unless you’re doing in excess of $10 million in annual revenues, a personal guarantee is a given.

For a start-up, a business loan may be the only way of getting the operation off the ground. So if you find yourself with no other option, you may have to bite the bullet and sign that guarantee. Just make sure you know what the risks are before you do that.

Know What Your Liability Is.

  1. You’re co-signing for the loan. That’s what a personal guarantee is – you’re guaranteeing the loan will be repaid in full, with interest and any other amounts accruing on the debt. If the company can’t meet its financial obligations, it will have to come out of your pocket.
  2. Your personal assets are at risk. The lender can seize your personal assets – including your home, your bank accounts, investments, stocks and bonds, vehicles, revenue properties, etc. – to pay off the debt.
  3. If the business goes under, you’re still liable. If the company files for bankruptcy or goes into receivership, and the proceeds realized from liquidating the assets is not enough to pay off the debt, you may still be stuck with settling the balance.
  4. You could be held responsible for all of the debt even if you don’t own all of the company. If you read over the Personal Guarantee form, you’ll see that it contains a “joint and several” clause. This means that if there is more than one guarantor, all of them are jointly and severally liable for all of the debt. So even if you own half the company, you can be liable for repaying all of the debt if your partner defaults on paying his share.
  5. You get to pay more than just the principal amount. Don’t forget about the interest, late fees, penalties, and collection fees and legal costs if the matter goes to court. All of those form part of the indebtedness you’re promising to pay.
  6. Is the guarantee a continuing guarantee? A continuing guarantee has no termination date. If you want to terminate it, you’ll have to pay the outstanding balance.
  7. Repayment of the debt could be ruinous. Ask yourself how you could afford to pay off the debt if the lender took action on your guarantee. Would you be able to come up with the cash to cover it? Would you have to sell off all of your personal assets? Would you have to declare personal bankruptcy? How would all of this affect your family and your future?

Protect Yourself

  • If you’re a part owner, negotiate with the lender to limit your guarantee to the same proportion of the debt as your ownership of the company. So if you’re a 25% owner, you would guarantee 25% of the debt.
  • Always review the paperwork with your lawyer before signing. He/She can translate the legalese for you, and explain the implications of the guarantee.
  • If your landlord is asking for a lease guarantee, offer to pay a security deposit instead.
  • Ask the lender to limit the guarantee to the first 2 or 3 years of the loan or, if the credit is a revolving line, to add a “sunset date” to eliminate or reduce the scope of the guarantee once the business has established its creditworthiness.
  • Get personal guarantee insurance for your business. There are a number of companies who provide this type of insurance, so shop around and do a comparison of rates, features and options.
  • If you sell the business, get the lender to sign a release from the guarantee.

Don’t sign a personal guarantee if you don’t have to. But if there’s no alternative, then do your homework before you sign. Know what the risks are, and what you could be in for if the business can’t pay its debts. You’ll sleep better for it.

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Want to Keep Great Employees? Cut Them In on the Profits

Posted on April 23, 2013 by Heather Cuthill

I’ve been lucky enough over my working life to own a piece of several of the organizations I’ve worked for. Nothing inspires dedication, hard work and above-and-beyond effort than ownership of the company. When your future is tied to the future of the business, you do tend to feel a bit anxious over the bottom line.

Woman in office chair

Free images from FreeDigitalPhotos.net

But it’s more than that – it’s a sense of pride and accomplishment when the company succeeds. You know that all the hours you’ve put in have helped to contribute to that success. And that pride nurtures a strong loyalty to the business that might otherwise never take root.

Small business owners might think that profit sharing only works for large corporations whose shares are traded publicly and who have plenty of assets, but profit sharing programs are probably even more valuable for SMBs than for larger companies. Incentive programs like profit sharing, stock options and SARs (stock appreciation rights) allow smaller companies to attract and retain top notch employees that might otherwise be recruited by larger competitors.

An employee profit sharing plan gives an SMB an opportunity to offer their employees retirement benefits, reduce its taxes and maximize 401(k) contributions.

A stock option plan is a relatively simple way of directly involving your employees in the future of the business, by offering them shares of stock in the company at a discounted rate from the full market value. Stock options vest over time, so the longer the employee stays with the company, the more shares they are entitled to purchase.

Stock appreciation rights (or phantom stock) are really a form of bonus given to employees and/or management if the stock price of the company increases within a specified period of time. The bonuses are paid out in either cash or stock.

It’s not hard to see how any of these incentives would be attractive to employees. When you reward your staff for their contributions to the success of the business, they work harder, they’re more satisfied in their work, and they’ll stay with the company longer.

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How to Apply for a Registered Trade-Mark

Posted on April 16, 2013 by Zak Muscovitch

Most successful businesses would say that their brand is their most important asset. A well-known and respected brand attracts new customers and keeps old customers coming back. But how do you protect your brand? Generally, the best way to protect your brand is to adopt a brand name that is eligible for protection as a registered trademark and then to register the brand as a trademark.

Accordingly, there are several steps to trade-marking your brand.

© 2012 Heather Cuthill

© 2012 Heather Cuthill

The first step is to select a brand name that you can actually protect. Some brand names that you may consider adopting are generally, just not protectable as trade-marks. For example, HOUSEKEEPING for a housekeeping service, is what is considered a “descriptive” mark, and is therefore not generally eligible for trade-mark protection since if one company got a trade-mark for HOUSEKEEPING for housekeeping services, it would prevent other housekeeping services from using the most apt and descriptive language to describe their own services. Similarly, TORONTO LAWYERS would not generally be eligible to be a trade-mark either, because it is what is considered “geographically descriptive”, since every lawyer from Toronto should be free to describe him or herself as a “Toronto Lawyer”, without fear of infringing upon someone’s “trade-mark”. Accordingly, one must always try to adopt a “distinctive” and not “descriptive” brand one intends to obtain trade-mark protection.

The second step is to make sure that your chosen brand is available for registration (meaning someone has not already adopted or registered this brand as a trade-mark). There are several kinds of searches that you can perform to ascertain if your brand is already taken as a trade-mark, but the most common way of finding out is to conduct a search of the official government trade-mark database for the country in which you intend to provide your goods or services. For example, the United States provides the USPTO trademarks database and Canada provides the CIPO trade-marks database. In these databases, you can search by keyword to see if someone has already registered your intended brand as a trade-mark.

Note however, that generally, except in the case of famous brands, such as COCA COLA, for example, you can still have a trade-mark for the same or similar words as an already-registered trademark, if your goods or services are sufficiently different. For example, someone can have ACME registered as a trademark for a brand of hairspray, and another person can have a registered trademark for ACME for orange juice, since the goods are so different, even if they share the same brand.

When researching whether someone has already taken your intended brand in connection with the same or similar goods or services, you should also look for what are referred to as “common law trade-marks”. Common law trade-marks are unregistered trade-marks that are distinctive and which have been used long enough and extensively enough that they are considered to be trade-marks even though they have not yet been registered. A Google search, as well as business name searches, are often good ways of turning up common law trade-marks. If someone has already effectively adopted your intended brand as a common law trade-mark, you may receive an objection from them at some point, or they may even oppose your application for a registered trade-mark.

Once you have researched your intended trade-mark, it is time to apply for an official trade-mark registration. In many countries you can do this online yourself or through the use of a trade-mark agent or trade-mark lawyer. Although it is possible to do it yourself, there are lots of rules about how to describe your goods and services and under what legal provisions you are applying, so it appears deceptively easy. For a small fee, you can hire a trademark attorney to assist you, and ensure that you do not waste your money preparing an incorrect application that will be refused because of errors. The government fees in Canada are usually about $350 for filing a Canadian trade-mark application, payable to CIPO, plus legal fees that usually range from $500 – $1,000.00. In the US, the USPTO fees are usually about $275 per type or “class” of good or service, plus legal fees usually ranging from $500 and up.

Once you have submitted your trade-mark application, it will go through an extensive “examination” by an official trademark office examiner, who will ensure that your application complies with all laws and regulations. The trade-mark examiner may ask you to revise your application or correct certain aspects of it. After a period of several months (the time period varies depending on the application), and provided that your application is successful, you will receive an approval notice. At that point, your proposed trademark will be “published” in an official journal, so that any interested third party can oppose your application. If no one opposed your application, you will then have an official registered trade-mark.

Having a registered trade-mark will generally allow you to stop anyone from “infringing” your trade-mark by offering the same or similar goods or services under the same or similar brand as your registered trademark, within the country in which you registered your trade-mark. Accordingly, having a registered trade-mark is a very powerful tool for brand protection. You can then use your registered trademark to send out a “Cease and Desist Letter” about an infringing domain name, for example.

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