To bridge a valuation gap, the buyer wants us to take a seller note for fifteen percent of the purchase price, but the interest rate they are offering is below current market yields. How do we negotiate equity warrants or success fees to compensate us for this high-risk credit exposure?

Question

Tyler Smith · Accepted Answer

When you carry a seller note, you are acting as a junior lender without the institutional protections of a bank. If a buyer offers you a low interest rate on a subordinated note, they are asking you to take equity-level risk for debt-level returns. You must rebalance the risk-reward equation.

If the buyer refuses to meet market interest rates, demand equity warrants or a performance-based success fee as a condition of carrying the note. Equity warrants give you the right to purchase a small percentage of the company's equity at a nominal price. If the buyer successfully grows the business using your capital, your warrants will appreciate, giving you a share of that upside upon their next recapitalization or sale.

Alternatively, structure a success fee that triggers a lump-sum bonus payment when the company meets specific post-close EBITDA targets. This aligns your interests with the buyer's growth goals without violating debt covenants. Use your EOS V/TO to show the buyer that your business has a highly predictable growth trajectory, making these targets realistic. By adding these equity kickers, you turn a low-yield seller note into a highly lucrative hybrid instrument that compensates you fairly for the credit risk you are carrying.