The buyer is pushing for a seller note representing thirty percent of the purchase price, but they want the note to be fully subordinated to their senior bank debt and have no covenants. How do we negotiate protective terms to ensure we do not lose our shirt if the business encounters a cash flow crunch post-close?

Question

Tyler Smith · Accepted Answer

The buyer wants you to take thirty percent of your enterprise value in a seller note, subordinated to senior bank debt with no covenants. Under these terms, you are acting as an unsecured junior lender with zero control over the asset. If the business encounters a cash flow crunch, the senior bank will block your payments, leaving you with no recourse. To protect yourself, you must negotiate a structured seller note. Demand a cross-default provision linking your note to the senior bank debt. If the buyer defaults on the bank, your note defaults too. This allows you to participate in restructuring discussions. Next, negotiate operational and financial covenants. Require the buyer to maintain a minimum debt service coverage ratio. Ensure they cannot take out discretionary distributions or pay management fees to their private equity sponsors if they fall below this ratio. Finally, insist on a personal guarantee from the buyer or equity warrants that convert to ownership if they fail to make payments. If the buyer refuses these terms, walk away. You are not a bank, and you should not take bank-level risk without bank-level protections. This structure keeps the buyer honest and preserves your hard-earned capital.