How to De-Risk the Personal Guarantee

The personal guarantee has long been a non-starter for certain searchers who would otherwise jump at the opportunity to buy a business with an SBA loan. And in many cases such searchers are higher net worth, older, more seasoned, and so actually pretty well qualified to succeed at business ownership. But the prospect of losing their assets, their home, is just too much risk to accept. Understandably, well today's guests have launched an insurance product to help mitigate this risk. Personal guarantee insurance or PGI. Brendan Burdett and Ryan Conner have founded Braddock Road Insurance Corporation, or BRIC to bring PGI to the SBA business buyer market. And they're not alone. Another startup is due to launch their PGI product in the months ahead. And by the way, this isn't pie in the sky. PGI already exists in the UK and other markets. So watch this space. If PGI takes off here, the effect on our market could be dramatic, and could finally enable those of you who would stay on the sidelines to get in the game. Here are Ryan Conner and Brendan Burdett, founders of BRIC. As a searcher, you know it's a numbers game. In part of winning that game is being able to quickly evaluate acquisition opportunities before wasting time on deals that will never close. Daniel Durand from acquisition lab capital has scored hundreds of SMB deals using a proprietary 22-dimension rubric covering business quality, deal structure, and buyer fit. In any webinar, this Thursday June 11th, he'll walk us through exactly how acquisition lab capital evaluates a deal from first look to investment committee decision and show you how to apply the same lens to the deal sitting in your inbox right now. You'll leave with a clear repeatable system for separating the deals worth pursuing from the ones that will drain your time, money, and attention. The webinar is score it or skip it, a framework for fast deal evaluation. And it is this Thursday June 11th at noon Eastern. Link to register is right at the top of this episode's show notes or on the acquiring mines homepage, acquiring mines.co. Welcome to acquiring mines, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. If you ask owners in the ETA and search community, which insurance broker provides highest quality work, great outcomes, and has a practice dedicated to searchers and acquisition entrepreneurs, one name comes up again and again. Obrally. Obrally risk strategies has worked with hundreds of searchers over nearly a decade and is in fact led by a two time successful searcher August Felker, which makes Obrally a specialty insurance brokerage for searchers by a former searcher. And if you've got a business under L.O.I, Obrally will provide complimentary due diligence on that business's insurance and benefits program. An easy no risk way to get to know August and the team at Obrally. To take advantage, check out Oberly-risk.com. That's O-B-E-R-L-E-Hyphen-risk.com. Link in the notes. Brendan Burdett, Brian Conner. Welcome to acquiring mines. Thank you, Wilfor Havanis. We're really excited to talk to you about this. So guys, I broke something of a policy that we have here on acquiring mines that we don't have vendors or service providers come on the podcast to talk about their offering. But the reason for the exception is that your offering could have big implications. And the offering is personal guarantee insurance, PGI. So as probably every listener knows, the personal guarantee, the PGI, looms over the SBA ecosystem and prevents many would-be entrepreneurs who might otherwise buy a business from doing so. The risk of just losing everything is too high. Countless potential searchers have asked me, have asked in webinars. What is the way around the PG and doing an SBA style acquisition? In the answer has always been a flat. There is not one. But PGI, personal guarantee insurance could effectively change that. There's still the personal guarantee, but the risk of it, the bite of it is potentially mitigated. So we're going to dive deep into this over the next hour. Let's start with introductions, Brendan, if you'd go first. Yes, well, you hit the nail on the head. This is a big pain point in the space. And we're trying to solve it. I first learned about this space about 10 years ago when I was in business school, about the search funds, about entrepreneurship through acquisition. I spent my career at the State Department before that, so I wanted to get some experience operating in a business setting before I moved into the space. I spent five years as a consultant, including some time at Hiscox, which is a specialty insurer here in the US. And then about a year and a half ago, Ryan and I started talking, Ryan and I went to college and to high school together, known each other for 20 years. We've always wanted to do something together. And we actually thought about buying an insurgency with an SBA loan. But the personal guarantee was a sticking point for me when my family and Ryan had had a personal guarantee at a previous company. So about a year and a half ago, we started building this company to try to solve this pain point in the space. Right. Thank you. Ryan. Hey, thanks Will. My name is Ryan Conner. I grew up outside of DC and was a lawyer and worked after law school at some law firms and then was at some insure tech and FinTech startups, really diving into the regulatory. As part of that journey, as Brendan mentioned, I had a personal guarantee and it was for about $2.7 million. I didn't have $2.7 million to my name at the time. And I woke up every morning thinking about it and then would kind of lose sleep at night every night. And when Brendan said, you know, let's do ETA, let's let's jump in here. I just couldn't really convince him to take that jump and take on that risk because psychologically, it's pretty devastating and Brendan and I go way back. I love him as a friend. I love his family and I wanted to figure out a way together that we could mitigate that psychological pain and hopefully bring more entrepreneurs into this space and take advantage of the SBA program. Okay, guys. So let's get right into the meat of this. I've been talking to people in the ecosystem about personal guarantee insurance, their thoughts, their questions. This is, there's starting to be a lot of chatter about this. People have questions and a lot of what comes back to me is sounds very intriguing, but how's it really work? So we're going to do our best to unpack that. Let's start simple, say more about the product, personal guarantee insurance and how it would work the basics. Absolutely. I can start off in Brendan's really are our numbers and data person and I've helped on the regulatory side. I want to first just start off and say that this is all pursuant to a lot of SBA regulations, existing insurance regulations. We've worked with a number of lenders as well as regulatory experts in the space to make sure this is done right. And we actually believe the personal guarantee is a good thing. It's a good motivator. And all we're really trying to do is turn down the risk essentially from a 10 to a 5 on the entrepreneur. We're not going to promise that if things go wrong that there's still not pretty bad consequences from this, but we're really stepping in at a point where you may not have a lot of options where your business is gone under. You've maybe taken out what's called an MCA loan that's really tripled down what you owe and there's not a lot of options. And at a very high level what we do is we look at your loan, we price it accordingly each year. And as long as you've got coverage, it's an annual policy. If something goes wrong with your business, what's going to often happen is your lender goes after you. And first what happens, they're going to have to go through what the SBA needs them to do, which is oftentimes liquidating the corporate assets. All that means is they're selling everything you have to try and be able to pay down that loan that you owe. And then after that is really what's called the personal guarantee kicks in. They're going to come after you, the lender itself has to come after you, your home, your assets. And what we do is we come in and we write a very simple check that covers a portion of what you owe directly to the lender itself. We're not gonna be able to save all your assets. We're not gonna be able to get you out of trouble. But what we do again is turn down that risk from a 10 to a 5. And we feel like if we can empower the entrepreneur at a point where they don't really have a lot of options, it's gonna be able to help you mitigate a lot of the really terrible consequences of this. What happens is if you default and go through this terrible process, you can actually never be able to access any government loans again. A lot of times the lien that the bank puts on your house won't go away even if you go through personal bankruptcy. And we're just doing everything we can to come in and empower you during this difficult process. I'll pause there, Brendan anything I'm missing or anything else to add there. - Yeah, we're covering 50% of the risk when the personal guarantee gets called as Ryan said, we'll send a payout directly to your lender that produces the loan balance directly in half. We're aiming to bring more capital into the system and improve recoveries for banks for the SBA and allow borrowers to have a system or that they can work through that's gonna be easier than the full weight of the full loan amount personally guaranteed by their personal assets. - So when you said turning the risk down from 10 to five, you were actually saying mathematically, literally, the amount, so 50% coverage. So let's say, and we're gonna do some kind of more deep dive examples in a minute, but just for right now, let's say I have a $2 million SBA loan that I'm defaulting on and I have PGI, you guys write a million dollar check to my lender. - After the corporate assets are liquidated. So after the corporate assets are liquidated. So everything is very liquidated. And so in a business that has capital assets that will be more in some of these sort of air ball, business services type businesses that a lot of SBA buyers acquire that might be very little. - Yeah, absolutely. And the way that we thought about this was again from personal experience, it would be a lot easier to sleep at night, to have a little bit of peace of mind, being on the hook for $500,000 versus a million. And I think one of the things that the two of us really admire and value about entrepreneurship is that resilience, that creativity, that ability to negotiate. And we're trying to be something where we can offer something, bring people some cash at the table that they can navigate these situations better. I'll pause there, but just wanna make sure that makes sense. - Yeah. Okay, but let's just carry on with our little micro example here. So I've, there are the business assets have been liquidated. Let's say I still have a balance of $2 million on the loan and you guys stroke a million dollar check. I still owe a million dollars. And if that's more than my net worth, aren't I still cleaned out? - Absolutely. What's that's doing though? It's still helping you get out of some of the personal consequences of bankruptcy when it gets a lot worse. And just taking a step back, not to get into the real bad weeds of this, but the, what you wanna do when you're going through these situations is really be cooperative with your lender and be able to come up with a way to work with them. What a lot of entrepreneurs that happens is they get scared and then they disappear, which unfortunately is the worst thing that can happen because then your collections go over to the US treasury and the amount you owe can actually increase, which is pretty scary. And what we're trying to do is again, keep you in that cooperative phase with your lender so that you can work out a way to potentially have a payout plan or come up with some way to avoid those more draconian consequences when it goes over to the treasury itself. A lot of times some of the folks we spoke into that our potential insured individuals already come to the table with a lot of assets. So one or two of them have two, three million dollars because they're mid-career operators. They've developed some significant house and personal wealth as well as their spouse. And if they're jumping into the ETA journey later in life, they have a lot more to lose than someone might be earlier in the process. And so in that case, yes, you're totally right. They still may lose that entire million, but it's protecting and shielding their additional assets if they have assets that are over that one million. And that's what's been really interesting to us as we've spoken to a lot of folks that say, "Hey, I've been on the sidelines for two years because I'm so scared of this." And the call I'm having with you is something that can help me actually unlock getting a deal across the line that I can go to my family, I can go to my spouse and really explain this. And that was really our goal of what we're trying to do is not solve the pain point entirely, but provide a tool for a lot of those mid-late career operators to just think about that risk on a holistic basis. Good framing, the holistic basis, because I think I was oversimplifying where if the business is in default, you lose everything as if there's some binary outcome. And of course, there's a whole spectrum of outcomes. And if you're somebody with resources, already, like you said, a balance sheet of two or three million dollars, let's say, in your business fails, you may be able to absorb the entire pay down the loan personally without even going into bankruptcy, but then you've just depleted all of your family's resources or some significant percentage of your family's resources. And so to have that pain is material, extremely close. So yeah, okay. Let's actually get into the kind of philosophy of this a little bit. One of the other things that jumped out at me and others that I've talked to about this is the idea that the personal guarantee as much as kind of we all hate it, it does serve an important purpose of skin-in-game, serious skin-in-game. And so there, one reaction to this whole category of product might be that are we facilitating bad behavior by taking away or mitigating some of the teeth of the PG, your response? That's another important part of why we're doing 50%. We want to keep this alignment of incentives between the lender and the borrower. We want the skin-in-game to exist. We just don't want the downside risk to be potentially catastrophic. That's what we're trying to take away with this insurance policy. Take what can be a truly catastrophic risk if it's sent over to the Treasury Department to put a 20% fee on top of what you owe. They'll use all their incredible financial tools to siphon your wages and garnish your social security payments if it goes on that long. It can be a truly awful experience. With TharnSurge product paying that 50% of the loan creates an opportunity for the borrower to work with their lender to come up with a payment plan, to create it to-- there's a scenario now that exists that didn't exist before. That's a catastrophic loss that's then turned down 10 to a five, something that could be manageable for folks. And just to be totally kind of humble about this, we realize we're first a market. We realize that there may be other forms of coverage. And we really wanted to just get this out to help people as soon as possible. And we might have ways to make this product better in the future and get feedback. It was-- it's a pretty large lift to come up with new types of insurance. You think about cyber is really kind of the only new funky thing that's come out in the last 20, 30 years. And we wanted to be really conservative initially just to get something out to start helping people. And we want to get feedback. We want to make it better and continue to approve it. And we want to totally recognize that it is a new concept. But we wanted to, again, just make that first step. Looking to secure an SBA loan to buy a business, meet Pioneer Capital Advisory. Your go-to partner for sophisticated buyers who want deals closed quickly and on the best possible terms. The Pioneer team has closed more than 100 SBA loans, averaging timelines well below industry standards. Founder and owner, Mathias Smith, in COO Valerie Stash, bring over two decades of SBA lending experience. Mathias and Valerie have built a team that meticulously works your deal from underwriting to close. You'll have a full bench working on your behalf, sales associates who streamline onboarding, M&A financial analysts who craft investor grade lender decks, and an operations team that manages every step of the closing process with institutional level rigor. Pioneer is not a single person, but your true deal team. Visit pioneercaps.com or click the link in the notes. A few things to respond to there. Ryan, first of all, you mentioned first to market. So interestingly, you, there are, I'm aware of at least two you guys and another. And I think I'm hearing about yet another startup insurance offering PGI startup. So just as an aside, what, what, why is it in the air all of a sudden? It's not just one service provider with a, you know, with a new insurance product, you guys, it's a, it's a small handful of service providers coming out with this has, has there been some rule change or, or is it just pure coincidence? You know, we're, we're, we're pretty simple guys. We're not super sharp. And we saw this product in other areas of the world, you know, and said, is there a way to bring this here? There's, there's a lot of folks that had worked on a similar product before that it's, it's, you know, what's really funny about it is when we talk to a lot of people, they say, well, why doesn't this exist? And I think a lot of it is really just bringing something new to market. But there's nothing genius about it. And, and we just kind of put our heads down and it's a massive market. That's part of it as well is even outside of SBA, most conventional loans, commercial real estate require this personal guarantees as well. And so I think a lot of other entrepreneurs saw that as a way to get into this space. You know, and, and we hope that there's as much coverage and as many options as possible, we know that we're the first ones to market. And I think the one thing that I would say is that we really enjoy speaking to small business entrepreneurs because we're kind of there. You know, we understand that pain point. And we're just trying to be really a resource to have people to talk to when they're like my deal close. What, what do I do next? Or how do I get this across the line? And that's really what our kind of bread and butter is just developing relationships, helping people and and trying to get them into this world. And that's that's what we're going to double down on and what we can offer. And if you call us at any time, we're just here to be a resource. So there are personal guarantee insurance products elsewhere in the world. So there's a precedent for this sort of product. Yes, there's there's a product in several other countries outside the US. And I think it's generally done pretty well. I think the difference is with the US is you've got this really robust SBA SMV lending market, which is different than where some of those other countries operate. Anything I'm forgetting there, Brennan? The growth in entrepreneurship through acquisition through search funds through the SB loan program has really increased interest in what the personal guarantee does, the downside protection. You've had people talk about this for several years and many people, many folks on the commercial real estate side, you know, have done many deals before. They're required to do personal guarantees from kind of early on in their in their careers. But in ETA often you've never taken out a loan before. So the personal guarantee is something new that you have to wrap your head around. And it's a pain point. And it's great. There's other companies trying to do this. We think SBA loans are a really incredible product. It's an incredible vehicle to buy a small business with the returns you can get because you only have to put 10% down are really fantastic allows lenders to make loans that they wouldn't without the backing that the SBA provides. So anything that is growing this market and supporting entrepreneurs we think is very good for everybody. So you're point about the fact that the personal guarantee is is kind of ubiquitous in real estate land. And I've often wondered why there is such I don't know resistance in our market or maybe I should say acceptance in the real estate market. I don't know maybe the howls on the real estate side are just as loud. But someone pointed out to me that well in real estate land that going back to the the liquidation of the assets you always have the real estate. So if you're real estate project doesn't turn out the way you wanted to there's still this asset that will that will that you can sell to pay down at least some of that some significant part of that loan. Am I thinking about that the right way? Yeah 100% and that's that's one one conversation we have with a lot of folks getting into this space where they say how can I reduce my risk and one of the really simple low-hanging fruits is if you can acquire business with 7a that has real estate and then with a lot of the new rules that I'm sure you've heard about as well. If you can if you can attach that real estate collateral it's going to essentially reduce your your personal risk and your personal guarantee which we then provide some coverage there. But that's that's one thing that really does help mitigate things. Great. I want to return to the the psychology and the philosophy of the personal guarantee and how you know the purpose that it meant to serve is skin and game. But skin in the game is also not a binary or monolithic and even without a personal guarantee many searchers have a lot of skin in the game in in the business anyway. They have probably well can vary some maybe less than six figures but many will have a couple hundred thousand dollars maybe more in the deal. They will probably have years of their life and career invested in the business. They will have the reputational damage the emotional and personal damage of having to of having to dissolve a business and let go of everybody. I mean they'll so yeah so there's a lot of there's a lot of already of financial skin in the game and reputational and emotional skin in the game even without the personal guarantee. So it's not as if the personal guarantee is the only thing keeping people motivated. So certainly not there's you know you have to have a real sense of self a real passion to be willing to get into this space and take ownership of your journey. And what we think is an incredible thing it's really kind of an American story of being willing to pull yourself up by your bootstraps to make something of yourself to build wealth for yourself and your family. And we really encourage to help people out in this space because it's such an incredible thing people can do and we want people to be empowered to do that. And of course there's there's a lot of weight on your shoulders as a business owner. So why should that be even higher with the full weight of a personal guarantee? And we'll just going back to kind of using it as a tool. You know one thing you think about you buy your business and maybe you want to buy another one or you want to figure out a way to reduce the risk. One of the one things you think about in year two three four as you're paying down that loan and you're running that business is how can I reduce my risk of that personal guarantee? And a lot of folks the first thing they do when they perform really well is they will actually refinance that SBA into a conventional loan that doesn't require personal guarantee. But the rates on that conventional loan may not be as solid as that original SBA. And so we've spoken to a few folks that say, Hey, this is also a really good decision point for me as I think about increasing my personal liability on my first business and then buying a second or third business. And again, provides a tool for me to expand potentially have a hold co and also analyze whether refinancing into a conventional loan that doesn't have a PG maybe different or have a different analysis when you refinance it back into SBA or actually just keep running that SBA loan. So again, we're trying to be a tool as people build their family and net worth and think about, do I want to acquire franchise a second one a third one. What does that look like as a as a total picture of my family and building that? Yeah. And so you would have I guess you'd have personal a personal guarantee insurance policy written per SBA loan that you have. That's what we're currently offering. We're doing this fairly simply to introduce it to the market. We'll have one policy for each loan that is taken out. And going back to the 50% number guys and how you've said you've wanted to introduce this to the market conservatively and then you're going to keep evaluating and see how the market responds. So that 50% number was the magic number that you guys arrived on or the I guess insurance carrier behind you who's going to be the actual underwriter of these policies mandated that or how did you arrive at that precise or it's just kind of a nice round number. How did you arrive at that exact number because these other providers who are going to be coming out in the market have a different number than 50%. Absolutely. The coverage that we look at is really going to be on a first of all kind of loan by loan deal and we're happy to chat with anyone on on what they're looking at. So everything is independent. We have an independent analysis. What we really wanted to think about is working backwards from the framework of what the SBA and the Lenders want in place. Lenders' performance really is dependent on if they're defaulting on a lot of loans, they can lose their preferred status with the SBA. What we wanted to do at a thousand-foot level is do this in a way that is compliant with a lot of different competing demands. Our number one priority is obviously serving the customer and really being there for the insured. But we also wanted to be something that could be used as a tool for lenders and a lot of deals. And we didn't want anything to happen where the Lenders felt like this policy could wipe out their lending book as well. And we arrived at that by speaking with a lot of different groups and making sure we were aligned there. One thing that we've also found is if you want to have the sellers of your business stay on and actually help with that business under an SBA loan, those sellers also need to sign up for a personal guarantee. And it's going to be really hard to tell someone, hey, you are selling your business, you're going to get a bunch of cash and then you're handing your business over to someone else, and then you're on the hook for $5 million. And we see this policy as a tool to help with some of those deals as well. And if you're getting to a place where you're taking all the risk off of the individual, one just doesn't align incentives as well. And two, we do believe that there is something good to having some teeth in the game. But we want to, you know, we're first to market and we're happy to chat with anyone on on individual specifics and just want to be a reference. You know, it's interesting from the lender perspective, they're always sort of threading a needle because their business is the business of lending. So they're incentivized to issue as much debt as possible. On the other hand, of course, they're also, they also need to make sure that it's strong debt and is little of that aggregate debt defaults as possible. So they're always kind of being pulled toward issuing debt, but also being conservative. And that's the, I guess, the science of art and science of being a lender. But anyway, this, so this product in some ways plays with that interestingly, because in some ways, this could bring, this could grow the market. This could bring in people to do SBA loans that otherwise would not have. So that's exciting from the lender's perspective. On the other hand, Ryan, as you just touched on, it could incentivize bad behavior or sloppy or, you know, people who may maybe borrowers who maybe feel less teeth, less threat. Because of a mitigated at PGI to get into deals that they shouldn't. How, how would you say lenders, how have you been working with lenders to tease that out and to, and to bring this to market? What, what is the reaction, been just talk about that? Absolutely. So we've had some very supportive lenders that have helped us from really getting the regular relations, correct, and the credit and underwriting. We want to do everything in compliant with the SBA, SOPs, as well as the lenders. And one individual specifically, we wouldn't have gotten off the ground without him, his name's Ted Shipley, and he is a phenomenal attorney at LiveOaks team. So it was really speaking with LiveOaks credit team initially and making sure we're doing this in a way that was fully compliant with the SBA. Brennan anything I'm missing there. What doesn't touch with their top lawyers, which are the top legal team in the SBA space. They've worked very closely with us to make sure our policies aligned with all the regulations that the SBA requires lenders, what lenders to follow. And, you know, I think lenders see the value here because they talk to borrowers that get cold feet and abandon the process late because they have to explain to their spouse that their house and their personal assets are going to be on the line. They lose borrowers all the time and we talked to someone this morning that bought a business in a previous life and deliberately avoided SBA loans because of the personal guarantee requirement. And so if there's value on the front end and closing more loans, there's value on the back end too because the payout of our insurance policy goes directly to the lender reducing their downside risk. Effectively kind of giving them more collateral in in the loan, right, which is a good thing. It's it ends up being a effectively for them it ends up being a safer loan actually, right. Many lenders do look at this as another form of collateral. You know, you need to be careful whenever you bring a new insurance policy to market. You don't really want behavior to change too much. We don't want lenders to see this and then take undue risks with with this new insurance policy. You didn't mention the one type of behavior that we would like to see and it's more people coming into the system. People that would have avoided the SBA loan previously because the PG now there's a way to kind of put wrap their head around the risk and reduce it by 50%. We want them to come into this market and take this journey that can really be incredible for them and their family. Well, on that point, one of the interesting wrinkles here dynamics to the PG is that in many cases, these these would be SBA acquires that we keep talking about that make the calculated decision not to do this because it's just too much risk. Because let's say they have a family and they have a mortgage and they just do not feel it would be responsible to put to make their kids homeless and I'm going to give you guys a quote here. Those types of people are also by nature of being further along in life and having a family and having real estate or a home are likely going to be more established, more experienced further in their careers. And therefore better qualified in sort of sort of statistical sense, you know, it's all case by case, but in theory, a better stronger borrower because they are mid 40s, 50s. That person is probably more equipped to jump into an SBA into a small business as owner of that small business than a 29 year old. So I actually there was very timely there was a post on search funder just a couple days ago last week by David Shriver, David's let me quote him and I just want to read it for for the audience, but it captures this perfectly. Okay, so this is an excerpt from from his post quote after two plus years of part time searching across a number of industries in my geo, my search has ended in keeping my day job. Now this wasn't a failure to find deals I found a lot of interesting businesses. It was a failure to tolerate risk. I could have closed on a number of deals, but I never solved for the house with a young family. I was not willing to put my primary residence on the line for an SBA loan and potentially make us homeless zero risk tolerance when it comes to my house. I tried everything to get around it. He lock lease backs, ABL, etc. And then he later says, I'm happy to put skin in the game, but just don't threaten to make my kid homeless. End quote. Now if you look at David's LinkedIn, he's seems like a very strong bar or a very well positioned professional to go by and run a business successfully. And so he's he strikes me as kind of the very type of bar or ideal for this product. If you want to respond, maybe maybe we've already said it a bunch of different ways, but if you'll respond to that exact quote. Yeah, and you know, I think David put a lot of heart and effort and we want to get David across the line. You know that those are the type of people. We're not going to go to market promising. We can save your house. We don't we don't want to do that. We want to be totally transparent and say we're going to do everything we can to hope you make that psychological choice to follow your path of entrepreneurship. And for David's case, it is difficult, right? When you've got folks depending on you, it's the last thing you want to do is put your dependence in that situation. And we think that part of it is is silly, right? You know, this person's put two and a half years and he do phenomenally at running a company. And you know, when you speak to a lot of lenders, a thing that's been really interesting to us is those are the types of folks that lenders want to really help in support. And they're the ones that are being prevented from getting across the line. It's kind of odd, but a lot of folks really don't like the ETA search fund world in the SBA space. And they want to attract folks like like David and we want to be that kind of extra nudge to hopefully get them there. Folks can learn more about what we're offering personalguarity.com is our website. and there's a way to now to understand this risk in a different manner. There's a way to price the downside risk and reduce it. Reach out to us, check out our website, learn more, and we'd love to talk to David and see if this is something that might have gotten him over the edge. Yeah. I don't think we've named your firm. Please do. We're Braddock Road Insurance Corporation, or Brick, the high school that Ryan and I went to in Alexandria, Virginia, right down the road from you was on Braddock Road. That's where we got to know each other on the freshman football field. And our website, www.personalguarantee.com. Great, guys. Okay. Let's return now a little bit to some of the mechanics of how this would work. So we're, you know, we were talking about the lenders and you were talking about, you know, being compliant with, you know, SBA rules and what the lenders need, et cetera. So is this issued at closing? Is it all tied up in the loan in some way or is it just a completely separate walk us through the actual sequencing here? What it would look like to actually get one of these issued on a loan? Absolutely. So two options not to get super boring and in the weeds, but to close any SBA loan, you have to go out and get life insurance. You generally need hazard insurance. You might need title insurance. As part of that, we can help you and get you across the line before closing. The second option is we have a time period after closing where we can look at things and also underwrite. So if you've closed recently, we're happy to connect with you. And we do that because there's a lot of crazy paperwork flying around when you're actually trying to get to closing. And we want to have some flexibility in helping people really just get that across the line. And again, it's really just around closing and afterwards as well. So happy to help. And if you do it after closing, then in fact, the SBA, the SBA lenders really don't have a say. They can't tell you entrepreneur business buyer to get you can or can't get this insurance product. So as much as you guys and I guess me are trying to make sure that this plays nicely with the SBA lenders, it's not like you actually need their permission or am I wrong? That's a really good question. This is a private insurance product. We don't really interact with with the lender on the policy and it's something for the individual to take out contractually. It doesn't have to be part of that closing process. If you do want your lender, your SBA loan broker, anyone you're working with, we're happy to collaborate with them. But it's really decision for for you to make and is not a requirement in any way. And when you talked about getting the insurance policy written before pre or post close, what do you envision the norm being? We can provide a quote once you have the details of the loan, the name of the business, the type of business, the amount of the loan. We can provide you an initial quote, but we want to actually bind the policy and provide you the policy documents until after the loan closes because we need, you know, we need an actual risk to manage with with our insurance policy. So it necessarily has to be actually written after close because that's when the loan actually exists. Buying a small business sound simple, find a company, do diligence, get a loan, close. In reality, you wear every hat just to get the deal done. And then the moment you close, you have to throw those deal making skills out the window and learn how to operate. You shouldn't have to rebuild this infrastructure from scratch and you definitely shouldn't do it alone. That's why Walker, Dibble created acquisition lab, what started as an accelerator has expanded into a complete ecosystem for acquisition entrepreneurs. Over six years, the labs 1200 members have acquired over a billion dollars in businesses. The lab puts everything under one roof, an active community, deal reviews, post closed services, and a dedicated fund helping experienced operators by larger businesses. If you're serious about buying a business, come see why lab members have a 40% success rate. Learn more in the show notes or at acquisition lab dot com slash acquiring minds. We've been speaking sort of in abstract terms and if we can get some real numbers here. Now I know that you guys can't talk pricing as I've learned just to touch about insurance by talking to you and some of the others. It's a highly regulated market. I think I would have guessed that. But I realized that insurance carriers, the guy goes of the world, don't don't advertise pricing. That's probably they're probably regulated against that. And also every single insurance policy is custom. As we I sound obvious and to say, but I never quite risk can be very unique. And so you need to need to underwrite them. Each insurance policy for each risk that you provide a policy for. Exactly. Exactly. So the question in anybody who's interested in this products mind is how much is a cost and there is no pat answer and you guys couldn't say it if there was one. But I am from another website we can provide a quote within 24 hours if you submit the information that we need. Okay. All right. Great. So you can you can get a custom quote there from the website. But in talking to folks and kind of gleaning. So a directional sense of what this might cost. I'm going to say 1 to 2% loan value per year, which translates to say it's a million dollars and loan. That would be $10,000 10 to $20,000 a year, which is what is that, you know, $900 to $1,900 a month, is that math, right? So let's for simple math call it a thousand to $2,000 per month. A per million dollars of loan value. So that would be, you know, three to $6,000 a month if it was a $3,000,000. And with that hypothetical, which you guys can't really just indulge me and let's use that as the kind of the hypothetical cost. Can we can we have some examples here of like a different loan values to net worth ratios because I think and let's preface this by by tell me if I'm thinking about this the right way, I would think for the borrower for the the SBA buyer, the two key numbers that they need to think about as they approach the possibility of this product are the loan value. Obviously that will determine price and it will determine what they're on the hook for so loan value and then their own net worth. So if it's a $5 million loan and I've got $50,000 to my name. That's a very different picture than I've got $5 million to my name and it's a $2 million loan, whatever. So it's the with those be the two key numbers that kind of inform the rest of this calculation. We're going to look at a lot of the numbers that the bank looks at as well. The service coverage ratio is important for the banks. It's going to be important for us to understand how the business is doing as well. So that's the other component but for the borrower the the loan value is very important and then their net worth is also important to the ratio of their net worth to what they owe. I'm certainly impacts how they're going to view the risk of these loans and the risk of having the personal guarantee on their head. So all of that's going to go into our underwriting for each of these insurance policies. Yeah, and just at a holistic level, not to like go back to this, but that's why real estate can be really important is because you've got some actual collateral to protect that loan if things go bad and why the new recent rules around the seven a and 504 program that if you can have a lot of real estate as part of your business acquisition. That is a way to help mitigate the downside protection on the loan and why it's such a kind of awesome new new new program to take advantage of. And if people want to learn more about those new loan limits, the seven a combining seven a with 504 for $10 million total. See our webinar with Heather Anderson, which we did last week where she impacts it out very, very helpful valuable. And just going back now to the numbers and we're going to walk through a couple examples. The other thing about the way those two numbers play the loan value in your net worth is also whether or not the premium makes sense to pay. So this isn't this is a significant expense as we said, you know, $1,000 a month per million dollars of loan. So if you don't have a lot of net worth to I mean, and over a number of years that premium starts adding up and are you the aggregate that you paid in premiums could could for some people, I guess catch up with the very number they're very net worth that they're trying to protect. And so then it makes less and less sense. So a couple of things that. So one, many insurance policies, you've property insurance for your home or auto insurance. These premiums tend to go up over time in the annual under-reddit. Our policy is gonna go down over time in almost every case because it's percentage of the loan that you're guaranteed. But with the annual policies, you're also not required to keep this. If you're doing really well, you're four or five, the business is humming along, your cash flows are great, your paying down the loan much more quickly than you expected, which happens in many of these cases. There's no need to continue paying for our policy. It gives you flexibility as a bar where to how much coverage you want and how long you wanna have that coverage. We've also spoken to a number of lenders that are actually interested in increasing the loan amount in order to pay for this initial premium policy. So that's another thing that we've spoken to a number of lenders about. - I interesting, so it would be financed. The point about things are going well, and so you, borrower entrepreneur, me decide that you don't need the PGI anymore. What about the reverse case? Because it's not going well, or even if it's not even going terribly, but it's a typical J curve, which we all know is everywhere in this space, where EBITDA drops in the years one, first couple of years of ownership. You, as insurer, might say to yourselves, why don't this business looks worse than it did a year ago when we originally issued this policy, we don't wanna reissue it, or the price is going up a lot because now all of a sudden, EBITDA was 1.2 and now it's 700. - Yeah, absolutely. I can take that one. I think part of this is just taking a step back. A lot of folks assume these loans are paid almost as their mortgages. And in the real world, what can happen is you have during that J curve, a lot of businesses that go on to do very, very well will miss some payments. And the banks wanna work with you individually to really make things long-term. And they're not gonna go after a lot of those loans just if you've got a little period that you're not performing. And that's really where we wanna come in and provide that peace of mind that you do have some protection there and to be super specific, we wanna have that annual policy really to just check in, figure out a way that we can help you as we're going forward understanding what's going on with the business. But if we're not renewing folks and really causing a lot of issues, it's a small world and we know that this ecosystem really relies on reputation and trust. And if we did that, we would be dead in the water. And trust is really important to us and it's really just making sure that we know each year what's going on with the business. And when you speak to a lot of folks that have gone through this, a lot of folks just disappear because it's just so much psychological pressure and no one can really find them. And what we're trying to do is really support folks to have a collaborative process when things are going wrong and our insurance obviously you've got exclusions, coverage applies, details apply, are really where we can help people in those situations. - There's been a lot of time looking through all the data available on SP loans. And I think we can encourage everyone who's getting interested in the space. You can look at how different types of loans, behave over time in different economic environments, how different industries do, even how different lenders have done over time and they're underwriting these loans. And the J-curvis is very well known. We want to be there when people need us. And we want to provide a lot of value and support entrepreneurs in this space. But we understand their ups and downs and there's no smooth path to the top. There's going to be dips and we want to be there to support you as much as we can. - And the way that your arrangement with the insurance carrier who's behind you, who's actually underwriting these policies is you have what is called an insurance land delegated authority. - Exactly right. - So you guys actually make the call because my follow-up question would have been, well you guys might, your answer to the market is just trust us. But if it's some distant insurance carrier behind you who's actually going to be the one making the call as to whether or not to renew an insurance policy of a small business that does it look so good now, they may say, sorry no. - Yeah, we're working with the very well capitalized insurance company behind us. They're A-rated, which is excellent in the parlance of AMBest, which is the rating agency. And what we are set up as is called a managing general agency or managing general underwriter. So we actually have delegated authority from our carrier partner to underwrite these loans for insurance. And there's a long set of documents that explain the exact authority that we have and anything that's within the standards which we've agreed upon who we're able to underwrite the policies for. And then we've used all the FOIA data to develop our underwriting and an actuary bottle to come to an agreement with our insurance carrier and we've tried to, we worked for months with them to get this in the right place. And they're sure we have enough authority in order to provide as much coverage as possible. - But guys, I mean, many of the horror stories on acquiring minds, one of the kind of patterns of a SBA SMB acquisition gone wrong is some sort of seller fraud or malfeasance. And that could be catastrophic and can surface quickly and dramatically. So you're saying, and so let's say it happens in month eight or month six. And so the next, the second six months of the entrepreneur's ownership is just a tailspin. You're saying that even in a case like that, they can trust that you'll renew their policy. When it really looks like there's been, some skeleton in the closet, where this business ain't what it seemed, they can trust you to renew that policy. - I think just to take a step back, we are not gonna be able to reduce the risk to zero. And the best advice I ever heard in this world was from a close friend in Charlottesville was you need to be able to sit at the dinner table, sit across from that owner and trust them with everything you possibly can. And if you don't trust that owner, no contracts or anything is really gonna be able to totally mitigate the risk in that situation. And to be totally clear on your example, our policy is claims made. And so exclusions apply, there's details or happy to review that with everyone, but if you've got our policy in place and the actual lenders coming after you for your personal assets in that period, we've got coverage in place. But again, the best advice we give people is you, you don't wanna get into a deal where you're not 100% really trusting the owner to begin with. And when you really look into these stories where things go wrong with the personal guarantee, it's generally a lot of times. It's when the seller has not disclosed things or the seller totally blows a non-compete. And so anytime anyone's pushing against a non-compete, you wanna walk away. Any butterflies you have in your stomach that you don't trust this person, you just walk away. There's lots of incredible entrepreneurs out there and a lot of opportunities. But that's where really people go wrong is when you've got the wrong individual you're sitting across from. And no amount of contracts or anything can really get you out of that unfortunately. - Let's do a couple examples, guys. Can we do that? Do you have a couple that you brought with you? - Yeah, so we've had a number of conversations. We've talked to a lot of borrowers. We spoke to, yeah, Brian mentioned kind of, in the last couple of weeks, who has been going through this process for a couple of years. They, like many people in this space, have a very supportive spouse that is helping their family stay afloat as they have left their job and focus full time on DTA journey. And despite this, support from the spouse, it's still tough to wrap your head around putting the house that you and your spouse live in on the line. And you feel the guilt inside because of the weight that you're kind of putting on your family going through this journey. And then your mind starts to wander and you think, if I buy a company that goes bad, the weight's gonna be worse that I put on this family. The guilt's gonna be incredible. How am I going to, how am I gonna do this? And without risking everything, that my spouse and I have built. And this is a type of person that has really been waiting for a policy like this to be available to him. And that's the type of person. You know, there's many different types of people that were trying to support, but someone who's really, it feels the weight of entrepreneurship and the guilt of potentially causing. their family to be in trouble. This is the kind of person that we want to really encourage to wrap their head around the risk that they're taking and reduce that risk in a way that they can go full-borne to, you know, his his ownership and entrepreneurship. - I think the thing that was really ironic about that was it was a second generation entrepreneur in Oregon. And his parents had to usually use SBA loans to build out their family's wealth. And I think it was actually through some restaurant franchises and some lodges. And the parents, their whole family's net worth before they came over here was initially many years ago built on the SBA program. And the story that's really sad was he didn't want to put everything that his parents had earned. He was 40, 50 now. He didn't want to put all that hard earned wealth back on the line for his SBA loan. And it was just a really interesting story of how this can empower, you know, first generation families. And then once they've built out that wealth and have something, there's a sense of kind of risk and like you don't want to jump back into it. If you have developed your initial stability there. And so that was really kind of heartwarming to hear of like, okay, this is a way to really from a multi-generational way, take advantage of these SBA loans and continue to build out your family, but not having again be a tool to think about that when you've got a full family plan and you're thinking of inheritance, you're thinking of how to reduce that risk. But that was a really cool story. - We spoke to another borrower in Arizona who a few years ago bought a cleaning company and has run that very successfully. They used an SBA loan to acquire that company. Now with that in a pretty good place, they're ready to take out another SBA loan to buy another company. But now the previous company was bought when they were single. When their risk profile was a little different, they are now in a relationship and maybe getting married at some point in the next couple of years and see that bringing a spouse in to have this conversation about putting all their newly joined assets on the line through the personal guarantee is just a different thing to consider than his previous acquisition. And this policy is something that's gonna help him have that conversation in slightly different terms than without the downside risk mitigation. - And I think that paper in Penn is, you can get really wrapped up into the stories of the EBITDA and the specific companies and how everything pencils and what a loan looks like. But when you zoom out, it's really stories from the heart of people changing life stages, they're getting married, they're inheriting grandparents money. Maybe they're fresh out of business school, but they're starting to date and without really factoring that in till like how you look at entrepreneurship, how you jump in, you miss a lot of, I think like the soul behind it. And it's those stories that we kind of wanted to build this out is just providing a tool so that people can navigate those life decisions within the decision of jumping into entrepreneurship. - We spoke to a group of four guys in Ohio and Michigan that are rolling up doggy daycares and adjacent businesses. And one of them runs the business full time. The other three I think all work at hedge funds. They're all kind of splitting the SP loans that they've taken out and the PG on each of their heads just continues to grow as they take on more SBA debt. And this is one of the groups that they thought about refinancing everything. But then they heard about this as an option. And the cost of refinancing into conventional loan with rates where they are now versus when they took out these loans is so much higher than what they would have to pay to take out this insurance policy on loans that they take out moving forward. - And by the way, in a case where there are multiple borrowers or multiple PG's, what does that look like? - Yeah, really good question. We ensure one individual, but the partners anyone that's tied to that loan essentially is getting some advantage if they have that policy. So it can help if you've got two or three partners and maybe one has a lot of net worth and one doesn't. It can be a way to kind of mitigate or distribute that risk in a way that evens out how much each one is on the line for. And so that's another way that again, as a tool to think about as if you've got a group of people, maybe someone says, well, wait a second, why am I putting my $2 million net worth on the line when my buddy is not putting anything on the line? That's not really fair. And so again, as a tool, this can come in to potentially spread that risk a little more evenly. - So the business pays for the PG, I, and the $2 million partner has his risk mitigated by 50% and the business pays for it. And so the risk has been spread someone. - That could be one way to do it, correct. - How else makes you do it? - Oh, just as a tool, just as a way to think of partners, I think that's the hard part. I don't know if there's a lot of options. If you got three buddies and one's really rich and one doesn't have anything, that's the tricky part is not to get into the nerdy part, but that's what joint and several liability means is especially with the seller roles is anyone on that loan, the lender has to go after them for everything and that's where it's hard to take a group of three people and commit to this and have everyone be on the hook for everything that that's the hard part of it. - Ryan, the seller roles you had touched on that earlier, remind us what the rule change was and that's now in force and let's explore this a little bit further. - Absolutely, I am not expert on the prior, but I can tell you some kind of live deals on how it generally works is an example would be a seller is doing a business acquisition, meaning the original owner of the business. If you want, if you're coming in and you want to purchase that business, but you want that owner still to have some teeth in the game, you want them around to maybe help you with sales or operations, they essentially stay on the cap table and have some equity in that new business. Now, the tricky part in convincing a person to do that, if I understand things correctly, is that the SBA is gonna require that old owner to actually personally guarantee the entire amount for about two years. So even though they're just a 20% equity owner, they could still be on the hook for up to $5 million, let's say, and that can be tricky to again, convince someone to do that. And what we would like to be able to do is have an offering that reduces the risk for everyone on that loan and can provide a tool for business brokers, loan brokers to approach an owner that's maybe not totally willing to sign up for that, 'cause it's kind of crazy if you think about it, but if you can reduce the risk, it's just two years, it can be a lot more comfortable to think about. - You said, Ryan, it's kind of tricky to convince a seller to do that, I think that that was an understatement. And where it's really bitten is in trades businesses where licensing is required, because often the seller owner is the one with the license, and so keeping them involved, at least during a transition, while you buy or find some other license holder was a way to do it before. It's really hurt the ability for a borrower to acquire a trades business where licensing is strict and required. - Absolutely. And have you seen, now as you talk about it, helping that particular dynamic, Ryan, have you actually seen examples of it or is this all in theory? - This is all new, we're new to market. Again, we want to be a tool so that, you know, again, the thing that has come across is just the creativity of a lot of SBA loan brokers, a lot of business brokers to get these deals across the line. And we just want to be another tool to help with those transactions. And again, when you bring in additional liquidity to the system, you might be able to again, get people more comfortable with different structures. And we want to be open to facilitating those. - You say you're first to market, so the offering is available now. - Absolutely. - So personalgiantee.com. And have you written any yet? We are in the process of underwriting. - The name of the firm again is Bratik Road Insurance Corporation or BRIC or just Bratik Road. Brendan Bernette and Ryan Conner, thank you guys for coming on acquiring minds to explain this. What an interesting development in our world. And we all hope that it brings more. strong entrepreneurs, strong borrowers off the bleachers and into the game. Really, it will be really, really interesting and exciting to see how this plays out. So, good on you guys for trying to innovate in this market and thanks for coming on. Thank you, Will. Thanks, Montreal. Thanks for everything you do. It's community. Thanks a lot. Hope you enjoyed that interview. Don't forget to subscribe to the acquiring line's newsletter. We send an email for every episode with an introduction to the interview, a link to the video version on YouTube. In soon, key takeaways, numbers, and more essentials from the interview for those of you who don't have time to listen or watch it. Subscribe at acquiringmines.co. You'll also find all our webinars there on the website, both those we have coming up and recordings of past webinars. At this point, there are over 30 webinar recordings, a wealth of information on all the technical nitty-gritty of buying a business. AcquiringMines.co