The buyer is asking us to carry a seller note for twenty-five percent of the transaction, but they want the interest rate set at the rock-bottom Applicable Federal Rate. How do we negotiate a market-rate yield and protect our position without scaring off their senior lender?

Question

Tyler Smith · Accepted Answer

A buyer asking for a seller note at the Applicable Federal Rate is looking for cheap acquisition capital at your expense. Since your seller note will be subordinated to their senior bank debt, you are taking on near-equity risk for a microscopic return. To fix this, you must demand a market-rate interest rate that reflects your actual risk profile, typically between eight and twelve percent in today's market. If the buyer claims that paying this cash interest will violate their senior bank covenants, suggest a payment-in-kind structure. This allows the interest to accrue and compound onto the principal balance of the note, to be paid in full at maturity, rather than draining their monthly cash flow. To further protect your position, insist on a block on all equity distributions to the buyer's private equity sponsors or shareholders until your note is completely retired. This aligns their incentives perfectly; they cannot take cash out of the business until they have paid you. You can justify this request by showing them your clean EOS Accountability Chart and structured management processes, proving that the business is highly stable and capable of supporting this debt load. Do not let them treat you like a cheap credit line. If they want you to act as the bank, they must pay you like one.