The buyer is asking us to carry a twenty-five percent seller note over five years, but their operating company has minimal tangible assets and they refuse a personal guarantee. How do we secure and structure seller financing so we do not end up holding an unsecured default risk?

Question

Tyler Smith · Accepted Answer

A seller note without collateral or a personal guarantee is essentially uncollateralized equity disguised as debt. If the buyer defaults, you are an unsecured creditor standing behind the senior lender, suppliers, and tax authorities. You will recover pennies on the dollar.

To de-risk a seller note when hard physical assets are absent, focus on equity and governance controls rather than personal assets. First, demand a pledge of one hundred percent of the equity of the operating company. If they default on your note, you have the contractual right to foreclose on their equity and take back control of the business without extended bankruptcy litigation.

Second, demand negative covenants in the credit agreement. The buyer must be restricted from paying management fees, issuing dividends, taking excessive owner salaries, or raising additional junior debt until your note is current or fully retired. Tie these covenants directly to measurable performance metrics like minimum debt service coverage and quarterly reporting requirements identical to what a commercial bank demands.

Third, negotiate an springing board observer seat or board seat that activates if the business trips a financial covenant or misses a scheduled payment. If they fall behind, you regain immediate visibility into their operations and financial performance.

Finally, structure the interest rate to incentivize an early payoff. Implement an escalating rate that steps up by two or three percentage points in years four and five, or add a balloon payment refinancing requirement. If a buyer wants you to finance their purchase, they must grant you real contractual leverage, not just a promise to pay.