The buyer is demanding we carry a 15 percent seller note, but they are refusing to grant us a personal guarantee or a security interest in our original intellectual property. How do we negotiate structural protections into the promissory note to secure our cash without killing the deal?

Question

Tyler Smith · Accepted Answer

If a buyer insists on a 15 percent seller note but refuses a personal guarantee or a security interest in your core intellectual property, they are asking you to act as an unsecured junior lender with zero leverage. You must establish firm boundaries to protect your capital. Unsecured notes in the lower middle market have high default rates because buyers know you have no recourse to force their hand.

To secure your cash without blowing up the transaction, negotiate a compromise on the security package. If they refuse to pledge the intellectual property because their primary bank lender demands a first-priority lien, negotiate a second-priority security interest in all company assets, including receivables, inventory, and intellectual property. This is a standard subordination agreement that commercial banks accept.

Next, instead of a personal guarantee from the individual buyer, look for a corporate guarantee from the parent company or any sister entities. If they refuse that, structure a negative covenant package in the promissory note. These covenants should restrict the buyer from taking distributions, raising executive salaries, or taking on additional debt junior to you until your note is paid in full.

Finally, include a covenant that allows you to inspect their books monthly or attend their Level 10 Meeting as an observer if they miss a single payment. This level of oversight gives you early warning signs of operational distress. If they do not agree to these basic protections, their intentions or their financial model are suspect, and you should walk away.