We are being asked to accept a significant seller note, but we are terrified the buyer will mismanage the company post-close and fail to pay. How do we structure the operational covenants and oversight in the credit agreement to protect our note?

Question

Tyler Smith · Accepted Answer

When you accept a seller note, you transition from owner to unpaid banker. If the buyer mismanages the business, your payment stream is at risk. You must protect yourself by building operational covenants directly into the credit agreement, not just the purchase agreement. Require the buyer to maintain a minimum debt service coverage ratio and a maximum leverage ratio. If they drop below these thresholds, it triggers a technical default. This gives you the right to accelerate the note or step in. Tie these covenants to the healthy operation of the leadership team. Specify that the business must maintain its leadership structure, including the key seats on your Accountability Chart. If the buyer tries to strip out the Integrator or eliminate the structured management meetings that keep the business stable, that must trigger an immediate operational covenant breach. Demanding monthly financial reporting and the right to observe board meetings keeps you informed. Do not rely on quarterly or annual updates. You need to see the numbers in real time, just like you did with your weekly scorecard. If things go sideways, you have the right to block distributions to the new equity holders until your note is current. This structure keeps the buyer disciplined and ensures your seller financing remains a secure, high-yield instrument rather than a write-off waiting to happen.