We want to transition our business to our internal management team, but they want us to carry a seventy percent seller note over ten years. How do we objectively evaluate this financial risk before rejecting the deal?

Question

Tyler Smith · Accepted Answer

Carrying a seventy percent seller note for ten years means you are essentially financing your own exit while keeping all the operational risk. To evaluate this objectively, you must analyze the transition through the lens of the trust equation. Specifically, you must assess your self-orientation and the credibility of your management team. A high seller note requires an immense amount of trust in the successors ability to run the business. Ask yourself if the team has shown the conative Follow Thru to maintain operational discipline without you. Check your Level 10 Meeting™ scorecards over the last year. Has the team hit their Rocks consistently, or have you been stepping in to save them? If you have been carrying them, you are set up for a default. You must also calculate the dumb tax of a failed transition. If the business fails in year four, you lose your remaining payout and get back a broken company. To de-risk this, negotiate a shorter note with a higher equity roll-over or bring in an external lender to fund a larger portion upfront. If the management team cannot qualify for outside financing, that is a clear market signal about their capability. Do not let sentimental attachment blind you to the financial reality.