Personal Guarantees in Business Sales & Shareholder Exits | Alberta
When a business borrows money, signs a lease, or opens a supplier account, lenders and landlords frequently want more than the company's promise to pay. They want a personal guarantee from an owner. That signature feels routine at the time, but it can become one of the most serious issues a shareholder faces when leaving a business or selling it. A guarantee you signed years ago does not automatically disappear when you walk away.
What a Personal Guarantee Does
A personal guarantee is a promise by an individual to be personally responsible for a company's debt or obligation if the company fails to pay. It pierces the usual separation between an owner and the corporation. If the business defaults, the creditor can pursue the guarantor's personal assets, including savings and, in some cases, a home.
Because guarantees are common in Alberta lending, leasing, and supply arrangements, many business owners have signed several over the life of their company without keeping a central record of them.
Why Exits and Sales Create Risk
Here is the trap: selling your shares or leaving the company does not, by itself, release you from a personal guarantee. The guarantee is a contract between you and the creditor. The creditor was never a party to your share sale, so your departure changes nothing from the lender's perspective. If the new owners later default, the creditor may still come after you.
This is why identifying and dealing with every outstanding guarantee is a central task in any shareholder exit or business sale. Overlooking one can leave a departing owner exposed to liabilities for a business they no longer control.
How to Manage Guarantees on the Way Out
Several tools can address the problem, and the right combination depends on the deal:
- Release from the creditor. The cleanest solution is obtaining a written release discharging the departing owner from the guarantee. Creditors are not obligated to agree, so this often requires negotiation.
- Substitution. The incoming owner may provide a replacement guarantee, allowing the creditor to release the seller.
- Indemnity from the buyer. If a release cannot be obtained, the buyer may agree to indemnify the seller for any liability arising under the guarantee after closing. This is a contractual backstop, not a release, so the seller still depends on the buyer's solvency.
- Repaying or refinancing the obligation. Paying out the underlying debt at closing can eliminate the guarantee entirely.
Due Diligence for Buyers
Personal guarantees matter to buyers too. A buyer should understand which obligations the company carries and whether any are personally guaranteed by departing owners, because those relationships can affect ongoing credit terms. Reviewing guarantees forms part of careful due diligence alongside conditions precedent and other closing requirements.
A Common Misconception
Many owners assume that because a corporation is a separate legal person, the corporation alone is responsible for its debts. That is generally true, which is one of the main reasons people incorporate. A personal guarantee is the deliberate exception to that protection. By signing it, the owner voluntarily steps outside the corporate shield for that specific obligation. Recognizing this distinction is the first step to managing guarantees responsibly.
Keep a Guarantee Register
One of the simplest and most valuable habits a business owner can adopt is keeping a register of every personal guarantee they have signed: who the creditor is, what obligation it covers, and when it was given. Guarantees are easy to forget because they are often signed quickly alongside a loan or lease. When the time comes to sell or exit, that register turns a frantic search into a straightforward review and ensures nothing is missed during due diligence.
Protect Yourself Before You Sign and Before You Leave
The best time to think about a personal guarantee is before signing it, and the second best time is well before an exit. Keeping a record of every guarantee and revisiting them during a sale helps prevent unwelcome surprises. If you are planning a shareholder exit or business sale in Calgary, contact Libra Law to review your guarantees, learn more about our business law services, or explore related topics in our articles.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. To obtain advice specific to your situation, please consult a lawyer or qualified professional.
