I guess I'll be the dissenting opinion.
If you're running a sandbox style game and the players bite off more than they can chew, let them. Run the bad guy at full strength. Pull no punches.
He'll probably waste the guards first. After all, they're more powerful than the PCs. Make it messy.
If the PCs run, let them. You've just made it that much more cool when they come back to try to beat him the second time.
If the PCs stay to fight, let them. Try not to kill them outright. Knocking them out, as long as it isn't cheesy is fine. I'm not sure what you're running, but in
4e, you can just decide to subdue with the final blow. The first time you do that, the PCs will really be worried. Force them to be the bad guys errand boys. Better yet, turn them loose all together and watch them try to explain how the whole royal guard got pasted, but they got away.
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