The buyer is asking us to carry a substantial seller note to help finance the transaction, but we are worried they might sell the business to a third party before our note is fully paid off. How do we structure a change of control provision to protect our debt?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are essentially acting as a junior lender to the buyer. If that buyer decides to flip the company to another private equity group or a strategic competitor before your note is paid, you could find yourself holding debt in an entity run by complete strangers. To protect yourself, you must include a robust change of control clause in your promissory note. This clause must dictate that any sale of the business, merger, or transfer of a majority of the assets triggers an immediate acceleration of the debt. This means the outstanding principal and all accrued interest become due and payable at the closing of the new transaction. Align this protective legal clause with the long-term vision in your V/TO. Use your visioning process to vet the buyer's strategic plan and ensure their intended holding period matches your repayment timeline. If they plan a rapid roll-up and exit, your acceleration clause will guarantee you get paid out during their recapitalization. Make this a non-negotiable term during the initial deal structuring. A seller note should help close the gap for the buyer, but it should never turn you into an involuntary partner with an unknown secondary owner.