The buyer is funding seventy percent of the acquisition with senior debt and wants us to take a subordinate seller note for the rest. How do we evaluate their proposed post-transaction capital structure to ensure the business has enough cash flow to service our note without choking its growth?

Question

Tyler Smith · Accepted Answer

When a buyer uses heavy senior debt to fund seventy percent of an acquisition, they are creating a highly leveraged capital structure that puts your subordinated seller note at extreme risk. If the business experiences even a minor operational downturn post-close, the senior lender's covenants will block the buyer from making payments on your note.

Before signing, you must run a comprehensive debt-service coverage ratio analysis on the combined entity. Ensure the projected post-transaction cash flows can comfortably cover both the senior debt service and your seller note payments, leaving a healthy operational buffer.

To protect your financial position, negotiate strict protective covenants directly into your seller note. First, require a cross-default clause, stating that a default on the senior bank loan automatically triggers a default on your note.

Second, establish clear financial covenants, such as a minimum current ratio and a maximum leverage ratio. If the buyer breaches these ratios, your note should immediately accelerate, or trigger an equity conversion feature that allows you to reclaim ownership of the company.

Finally, use your EOS experience to demand operational oversight. If the buyer misses a payment or breaches a covenant, the agreement should grant you a non-voting seat on their board or direct oversight of their leadership team, allowing you to step in and protect your capital.