The buyer wants to use an installment sale under Section 453 to tie up thirty percent of our purchase price, but they are pushing for a subordinate position on the note. How do we protect our payout priority while keeping the tax deferral?

Question

Tyler Smith · Accepted Answer

When a buyer uses an installment sale under Section 453, they are asking you to act as a lender. This deferral helps your tax liability by letting you pay taxes only as you receive the cash, but a subordinate position on the note leaves you highly exposed. If the buyer defaults, the senior lender gets paid first, which could leave you with nothing. To protect your payout while utilizing Section 453, you must negotiate specific structural protections. Insist on a stock pledge agreement where the buyer shares of the company are held in escrow as collateral. If they default, you can reclaim ownership. Demand personal guarantees from the buyer principals to bypass the corporate shield. Establish clear financial covenants in the note, such as a minimum debt service coverage ratio. If the company dips below this threshold, it triggers an immediate default, allowing you to intervene before the business is ruined. This structured oversight ensures you retain leverage. Do not allow the buyer to use your seller note as cheap, unprotected equity. Aligning these protective covenants with your EOS V/TO targets ensures the transition remains secure while you defer your taxes.