The buyer is a newly formed special purpose vehicle backed by a small private equity firm, and they are refusing to provide a parent company or sponsor guarantee on our seller note. How do we structure security interests to protect our principal?

Question

Tyler Smith · Accepted Answer

Selling your business to a newly formed special purpose vehicle, or SPV, without a parent company guarantee is highly risky. If the business underperforms post-close, the SPV can easily default on your seller note, and because the SPV has no other assets, you will have no meaningful recourse. If the private equity sponsor refuses to provide a parent-level or personal guarantee, you must secure your note with robust operational and asset-level protections.

First, secure a first-priority lien on the accounts receivable, inventory, and intellectual property of the acquired company, subject only to the senior lender's primary security interest. You must negotiate a pledge of the shares of the SPV itself. This means that if the buyer defaults on your note, you have the legal right to foreclose on the stock of the company and take back ownership of your business without going through years of litigation.

Second, write strict financial and operational covenants into the note agreement. These should include limits on the buyer's ability to pay out dividends, pay management fees to their private equity sponsor, or incur additional debt while your note is outstanding. Require them to maintain a minimum debt service coverage ratio. If they violate these covenants, it triggers an immediate default, allowing you to take action before the business is run into the ground. Track these metrics monthly to ensure you retain control.