The buyer is pushing for a subordinated seller note with no parent company guarantee, claiming their senior lender forbids it. How do we structure default remedies and security interests so we are not left holding an empty bag if they default?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a lender to the buyer, but without the massive institutional protections that commercial banks enjoy. If a buyer claims their senior lender prevents them from offering security interests or parent guarantees, do not simply accept the risk. You must negotiate hard for protective guardrails. First, demand a pledge of the acquired company's stock. If the buyer defaults on your note, you must have the legal right to instantly seize the stock and regain voting control of the operating entity. This fallback must be structured to bypass lengthy litigation. Second, negotiate restrictive covenants that limit the buyer's operational freedom until your note is paid in full. Forbid them from paying dividends, distributing cash to partners, or paying excessive management fees to their parent company if they are in default or if the payment would cause them to miss covenants. Third, structure a payment-in-kind interest mechanism that escalates if they fail to make cash interest payments. If they miss a payment, the interest rate should automatically increase and capitalize into the principal. Finally, insist on an acceleration clause tied to a change of control. If the buyer sells the company or brings in a new equity partner, your seller note must be paid off immediately from those transaction proceeds. Do not let them transfer your debt to a third party without your consent.