Personal Guarantees When Selling a Distressed Business in Ontario

Many Ontario business owners sign personal guarantees at some point — for a bank loan, an equipment lease, or a commercial lease — because the corporation on its own couldn't get the credit or the landlord wanted extra comfort. Years later, when it's time to sell (especially a business that's struggling), a common assumption creeps in: once I sell, I'm out.

That assumption is usually wrong. Selling the business doesn't, by itself, end a personal guarantee. Understanding why — and what actually does end one — matters just as much as negotiating the sale price.

A Guarantee Is a Separate Contract From the Business

A personal guarantee is a contract between you personally and the lender, landlord, or supplier — not between the business and that party, and not something that automatically travels with the business when it's sold. Selling your shares, or selling the company's assets, changes who owns or operates the business. It doesn't, on its own, change who promised the lender or landlord they'd personally cover the debt if the company didn't pay.

This is true even if the buyer is taking over the exact same loan, lease, or supplier account. Unless the creditor specifically agrees to let you off the hook, your guarantee generally survives the sale.

Why This Catches Sellers Off Guard

It's an easy trap because everything else about the deal does transfer — the lease often assigns to the buyer, the loan is often paid out or assumed as part of closing, and from a day-to-day standpoint the buyer is now "the business." It's natural to think your personal exposure ended along with your ownership. But a guarantee is worded to protect the creditor specifically against the risk that the underlying business fails — precisely the situation a distressed sale is trying to get out of. Creditors have little incentive to release a guarantee voluntarily unless asked.

Ways an Owner Can Actually Get Released

Simply having the buyer verbally agree to "take care of it" is not a release. Only the creditor — the party you actually made the promise to — can let you off that promise.

What Happens If You Don't Get a Release

If the business later can't pay and you were never released, the creditor can generally pursue you personally for the guaranteed amount, even though you no longer own or control the business, and even though someone else has been running it since closing. This is one of the more painful outcomes in a distressed sale — the seller walks away from the business but not from the debt.

Negotiating Your Release as Part of the Sale

1. Identify every guarantee you've signed — bank loans, equipment leases, the commercial lease, supplier accounts, credit cards tied to the business. Sellers routinely forget one.
2. Approach each creditor early, before the deal is finalized, to find out what they'll require to release you — this can affect deal timing and terms.
3. Build the buyer's cooperation into the purchase agreement — a covenant requiring the buyer to seek your release (or provide a replacement guarantee) as a closing condition.
4. Use an indemnity as a fallback, not a substitute — if a full release isn't achievable by closing, have the buyer indemnify you for any amount you're later called on to pay, understanding that an indemnity is only as good as the buyer's ability to pay it.
5. Get legal advice before closing if any guarantee remains outstanding — this is exactly the kind of loose end that's cheap to fix before signing and expensive to fix after.

Frequently asked questions