The private buyer wants us to carry a twenty percent seller note to close our deal, but their holding company has no operational assets outside of our target entity. How do we secure personal guarantees, asset pledges, or intercreditor terms so the buyer cannot walk away from the note consequence-free?

Question

Tyler Smith · Accepted Answer

Carrying a twenty percent seller note behind an undercapitalized acquisition entity is a common trap. Private buyers frequently create a new acquisition subsidiary that holds zero standalone assets prior to close. If business performance deteriorates, the buyer can default on your subordinated note with zero financial exposure beyond the equity they wrote off.

To secure real leverage, require specific covenants in your note purchase agreement:

- Demand a joint and several personal guarantee from the individual principals or fund sponsors, at least for bad-boy carve-outs such as fraud, asset diversion, intentional waste, or failure to follow contract terms.
- Require a junior lien on all corporate stock and operating assets of the target company. If the buyer defaults, you must have a recorded security interest under the Uniform Commercial Code, subordinate only to the designated senior bank lender.
- Insist on cross-default language. A default under the senior credit agreement should immediately trigger a notice event to you, and any monetary default on your seller note must be treated as an actionable default that restricts executive distributions and management fees.
- Embed information rights. Require monthly financial statements, trailing twelve-month revenue calculations, and annual audited statements. You need the right to inspect books and records within fifteen days of any missed payment.

If the buyer flatly rejects personal guarantees or asset liens, your seller note is not debt; it is uncollateralized equity disguised as paper. You should either price that equity risk by demanding equity upside or reduce the enterprise value to eliminate the note entirely.