The buyer wants us to provide seller financing for fifteen percent of the purchase price but is refusing to pledge the stock of the operating company as collateral. How do we secure our seller note without getting completely wiped out in bankruptcy or subordinated to the point of worthlessness?

Question

Tyler Smith · Accepted Answer

Accepting a seller note without a stock pledge is equivalent to offering an unsecured signature loan to an entity you no longer control. To protect your capital, you must establish hard operational and financial guardrails that trigger before a bankruptcy ever occurs.

Start by demanding a junior lien on all operating assets of the company, secondary only to the primary bank lender. If the senior lender refuses, you must structure a robust set of negative covenants. These covenants must prevent the buyer from taking specific actions without your express written consent.

- Limit the buyer's ability to issue new debt or secure additional senior lines of credit.
- Prohibit the payment of dividends, distributions, or excessive management fees to the parent company while your note is outstanding.
- Mandate that the business maintain a minimum debt service coverage ratio.

To enforce this, require the buyer to deliver quarterly financial statements. If you have kept your EOS Accountability Chart intact post-close, the team running the day-to-day operations should still be operating with high transparency.

Your subordination agreement must also include a clear payment blockage cap. This limits the senior lender's ability to freeze your interest payments to a maximum of one hundred and eighty days during a non-payment default. Without these guardrails, your seller note is highly vulnerable to being wiped out by the buyer's subsequent operational mistakes. Keep your terms strict and walk away if they refuse to secure your position.