The buyer is asking us to carry a subordinated seller note for twenty percent of the deal value, but we are worried about their post-closing debt levels. How do we evaluate this structure to ensure we do not end up paying a massive dumb tax on our transaction?

Question

Tyler Smith · Accepted Answer

Accepting a seller note means you are acting as a lender to the buyer. If the buyer over-leverages the business or fails to execute their growth plan, your note is the first thing that gets wiped out. To protect your capital, you must analyze the buyer's post-closing balance sheet with the same rigor a bank would. Calculate the total debt-to-EBITDA ratio of the combined company. If the senior debt plus your seller note exceeds four times EBITDA, the business is highly leveraged, and your risk is substantial. You must also negotiate protective covenants. Ensure your seller note contains an acceleration clause that triggers immediate payment if the buyer sells the company, changes control, or defaults on their senior debt. Finally, demand monthly financial reporting so you can track their performance against their covenant requirements. If you see their margins slipping, you want to know immediately, not after they miss a payment. Carrying a seller note can bridge a valuation gap, but only if you structure it with the security interests and default remedies needed to protect your hard-earned equity.