The buyer wants us to take a seller note for fifteen percent of the transaction, but they are refusing to pay interest during the first two years of the transition. How do we negotiate a fair structure for this deferral?

Question

Tyler Smith · Accepted Answer

Carrying a seller note without interest is a significant concession that dilutes your actual purchase price. If you accept zero interest, you are essentially providing the buyer with interest-free debt to acquire your own company. To negotiate a fair structure, you should tie the interest rate to the risk profile of the transaction. If the buyer refuses to pay cash interest in the early years to preserve their operational cash flow, propose a Payment-in-Kind interest structure. Under this arrangement, the interest accrues and compounds annually, adding to the principal balance of the note, and is paid in full at maturity. This protects your yield while accommodating the buyer's short-term liquidity constraints. Additionally, you must secure the note with a junior lien on the business assets and ensure there is a clear acceleration clause if the business is sold or refinanced. Use your EOS tools to keep a close eye on the transition. If you are sitting on the board or tracking quarterly metrics, you can monitor the health of the business to ensure your note remains secure. Never accept a zero-interest note without robust security and clear upside protections.