The buyer is using a newly formed holding company to acquire our business and offering a substantial seller note, but NewCo has no operating history or separate balance sheet. How do we secure our seller financing against default without violating senior lender restrictions?

Question

Tyler Smith · Accepted Answer

Accepting a seller note from an acquisition shell company without independent collateral is essentially writing an unsecured check to fund the buyer's equity. In a typical private equity or sponsor acquisition, NewCo has zero historical assets, and their senior bank lender will strictly prohibit you from placing a secondary lien against the company's operating machinery, receivables, or cash accounts.

To protect your principal without violating the senior lender's intercreditor covenants, structure your security package above the operating level:

- Equity pledge on NewCo: Require a fully executed pledge of one hundred percent of the buyer's equity in the acquisition entity, held in escrow. If NewCo defaults on your note, you have the contractual right to foreclose on their equity and take back control of the enterprise.
- Carve-out personal guarantees: While sponsors rarely provide unlimited personal guarantees, insist on bad-boy guarantees covering fraud, asset stripping, deliberate diversion of cash flow, or willful non-compliance with the purchase agreement.
- Covenants and information rights: Demand ongoing quarterly financial statements, compliance certificates, and board observer seats. You must track financial ratios so you see covenant deterioration months before an actual payment default occurs.
- Springing remedies: Stipulate that if the senior loan is fully repaid or refinanced, your junior security automatically springs into a subordinated lien against corporate assets.

Never accept a naked seller note backed solely by the good faith of a newly minted holding entity. Protect the downside before signing definitive agreements.