A private equity buyer is demanding we carry a fifteen percent seller note to close their debt funding gap, but they are offering a standard market multiple. How do we leverage our willingness to provide seller financing to negotiate a premium multiple, and how do we subordinate our note so we are not left holding worthless paper if the business struggles under their leadership?

Question

Tyler Smith · Accepted Answer

Buyers love seller financing because it reduces their upfront cash requirements and aligns your interests with theirs post-close. However, you should never provide a seller note at a standard market multiple without receiving a premium in return. If you are taking on the risk of a lender, you must be compensated like one. First, use your willingness to carry a note as leverage to demand a higher enterprise multiple. If the market average is five times EBITDA, demand six times in exchange for carrying a fifteen percent seller note. The buyer gets their deal funded, and you get a higher overall valuation that compensates you for the deferred risk. Second, protect the note from subordination. While senior lenders will insist that your seller note be subordinated to their debt, you must negotiate a debt standstill agreement that allows you to receive regular interest payments as long as the senior loan is not in default. Third, include operational triggers linked to your Accountability Chart. If the buyer replaces key leadership roles with unqualified personnel or fails to maintain the operating standards established during your EOS® implementation, it should trigger an immediate default or increase the interest rate on your note. This ensures the buyer maintains the operational integrity of the business while they owe you money.