The buyer is structuring the deal with a forty percent seller note and is demanding that any post-closing working capital adjustments be deducted directly from the principal of this note. How do we structure the promissory note covenants to prevent them from using arbitrary accounting adjustments to chip away at our seller financing?

Question

Tyler Smith · Accepted Answer

Allowing a buyer to offset post-closing working capital adjustments directly against your seller note is a major risk. It gives the buyer a unilateral right to withhold payments over disputed inventory valuations or accounts receivable aging, turning your seller financing into an unsecured piggy bank. You must establish strict boundaries in the purchase agreement to prevent this manipulation. First, negotiate a basket or deductible for any working capital claims. The buyer should not be allowed to adjust the purchase price for minor variances: set a threshold below which no adjustments can be made. Second, require that any disputed working capital adjustments be submitted to an independent, third-party accounting firm for binding arbitration before any cash is withheld. The buyer must continue making scheduled payments on the promissory note while the dispute is being resolved. Our recommendation is to separate the seller note covenants from the working capital reconciliation process entirely. Require that any working capital adjustments be settled through a dedicated escrow account funded at close, rather than offsetting the note. This keeps your seller note clean and ensures that the buyer cannot unilaterally freeze your principal and interest payments over minor operating disputes.