We are carrying a seller note for fifteen percent of the enterprise value and want to ensure we have recourse if the buyer defaults. Should we demand a personal guarantee from the buyer's principal or a pledge of the acquired stock?

Question

Tyler Smith · Accepted Answer

To secure a seller note, you want both a personal guarantee and a pledge of the acquired stock, as they serve entirely different purposes. A pledge of stock allows you to seize control of the company if the buyer defaults, while a personal guarantee targets the buyer's personal assets. You need a structured combination of both to create real leverage.

A pledge of stock is your operational safety net. If the buyer defaults on your note, you want a rapid, out-of-court foreclosure process that allows you to take back the equity of the business. This must be backed by a voting proxy that activates immediately upon default, allowing you to replace the board or leadership team and step back in as the owner before the buyer can run the company into the ground.

However, stock in a failing company might be worthless. This is why a personal guarantee is critical. If the buyer is a private equity firm, they will resist personal guarantees. In that scenario, demand a corporate guarantee from their well-capitalized parent fund.

For individual buyers, a personal guarantee is non-negotiable. To make this palatable, you can agree to:
- Limit the guarantee to a specific percentage of the outstanding note balance.
- Burn off the guarantee once the buyer pays down a certain portion of the principal.
- Require the buyer to maintain a life insurance policy with you as the beneficiary to cover the note balance.