The buyer wants us to accept a seller note with zero personal guarantees from their private equity sponsors. How do we secure this note against specific operational assets or intellectual property using a blanket lien to prevent a total loss if they run the business into the ground?

Question

Tyler Smith · Accepted Answer

Private equity sponsors almost never sign personal guarantees for seller notes. Expecting them to do so is a waste of negotiating capital. Instead of chasing personal guarantees, you must focus on securing your seller note against the actual operating assets of the company you are selling. You achieve this by negotiating a subordinated blanket lien on all business assets, including accounts receivable, inventory, and your core intellectual property.

Your main hurdle will be the buyer's senior lender, who will demand first-priority rights to these assets. To protect your position, negotiate a carve-out in the intercreditor agreement that specifically isolates your intellectual property. If the buyer defaults on the senior debt, you want a secondary lien that gives you the right to reclaim or license your proprietary technology and customer databases.

To monitor this risk, use your historical weekly EOS scorecard metrics as covenants in the seller note. Require the buyer to deliver monthly financial statements and quarterly compliance certificates. If their weekly scorecard metrics or debt-service coverage ratio drops below a specified threshold, it should trigger a technical default. This technical default allows you to step in, run an IDS session with their executive team, or demand accelerated payment before the senior lender can foreclose. Do not let the buyer treat your seller note as unsecured equity. Structure the security agreements so you have actual leverage if their execution fails.