The buyer is acquiring our company through a newly formed shell entity and wants us to hold a twenty percent seller note subordinated to their senior bank debt. How do we secure this note when the acquiring shell has no assets outside of our business and the bank refuses to let us take a junior lien on the assets?

Question

Tyler Smith · Accepted Answer

A special purpose vehicle with no independent balance sheet creates severe credit risk if the enterprise stumbles under leverage. When a senior lender blocks a second lien on the operating assets, you must secure the note through structural covenants and ownership control rather than collateral liens.

First, require an unconditional pledge of one hundred percent of the equity of the operating company. If the buyer defaults on your seller note, the pledge allows you to foreclose on the equity and seize operational control without competing with the senior lender over asset liquidation. Combine this equity pledge with a voting proxy that triggers immediately upon an uncured default.

Second, demand personal guarantees from the individual sponsors or a corporate parent guaranty from the fund management entity. Buyers will resist, but if they refuse to stand behind their acquisition vehicle, they are asking you to take equity risk for debt returns.

Third, establish strict negative covenants in the note purchase agreement. The buyer must be prohibited from extracting management fees, issuing dividends, or transferring intellectual property out of the operating company while any principal remains outstanding. You must also mandate quarterly delivery of full financial statements and proof of bank covenant compliance.

Finally, tie your note remedies to the senior credit agreement. Negotiate notice and cure rights that give you thirty days to cure a technical bank default on behalf of the company before the senior lender can accelerate its debt, protecting your equity pledge from being wiped out in a rushed bank liquidation.