The prospective buyer is acquiring our company through a newly formed shell LLC with no standalone balance sheet and wants us to carry a twenty percent seller note. How do we ensure that seller note is backed by real assets?

Question

Tyler Smith · Accepted Answer

Holding a promissory note issued exclusively by a newly created special purpose vehicle (SPV) means you are unsecured, regardless of the interest rate or terms. If the acquired operating business runs into trouble, an uncapitalized shell holding company can default on your note while shielding the buyer's primary fund or parent corporation from liability.

To transform an empty corporate promise into an enforceable, secured debt instrument, demand specific structural covenants:

- Parent Entity Guarantee: Require the well-capitalized parent entity or private equity fund to execute an unconditional, joint and several guaranty of the note. Do not rely solely on the acquiring entity.

- Operating Company Security Interest: Demand a perfected, secondary security interest in the tangible and intangible assets of the operating company via a UCC-1 filing, directly behind the senior lender.

- Equity Pledge Agreement: Insist on an equity pledge where the buyer pledges one hundred percent of the membership units or stock of the operating entity. In the event of an uncured payment default, this pledge gives you a legal mechanism to foreclose on the equity and seize operational control.

- Information Covenants: Require the buyer to deliver quarterly financial statements and maintain basic financial metrics, such as a minimum fixed-charge coverage ratio.

During your leadership team's quarterly planning sessions, evaluate whether carrying buyer paper is worth the credit risk. If the buyer refuses parent backing or an equity pledge, reduce the seller note and demand additional cash at close.