We are carrying a significant seller note, but the buyer refuses to pledge the company's intellectual property as collateral, claiming their senior bank has a blanket lien on all assets. How do we secure our position using personal guarantees or stock pledges without triggering a default with their primary lender?

Question

Tyler Smith · Accepted Answer

When a senior bank holds a blanket lien on the company's assets, you cannot secure your seller note with a primary security interest in the business itself. However, you do not have to accept an unsecured position. You can negotiate alternative security structures that do not conflict with the bank's covenants.

First, demand a pledge of the buyer's equity in the acquisition entity. A stock pledge allows you to foreclose on the ownership interests of the operating company if they default on your note. Because this pledge is at the holding company level, it typically does not violate the senior bank's negative covenants regarding liens on operating assets.

Second, require a personal guarantee from the buyer's principals. If the buyer is a private equity search fund or an individual sponsor, their personal assets or sister funds should back the obligation. This ensures they remain personally committed to the company's success and prioritize your payments.

Use your EOS framework to evaluate their operational capability. If their leadership team does not demonstrate the GWC to manage the business, no amount of legal structuring will save your note. Bring these security terms to your weekly Level 10 Meeting and make them a non-negotiable part of your deal structure before moving past the term sheet stage.