The buyer is asking us to carry a large seller note to bridge a valuation gap but is refusing to provide a personal guarantee or any security interest in the assets. How do we structure this note to protect our payout if they mismanage the company?

Question

Tyler Smith · Accepted Answer

When a buyer asks you to carry a seller note without security, they are essentially asking you to act as an unsecured equity investor with none of the upside. To protect your payout without killing the deal, you must structure protective operational covenants directly into the promissory note.

Start by negotiating negative covenants that restrict the buyer's financial behavior. The agreement must state that as long as the seller note is outstanding, the company cannot take on additional senior debt beyond a specified limit, pay out discretionary bonuses to the new executive team, or make distributions to shareholders that exceed tax liabilities. You should also demand monthly financial reporting, including balance sheets and income statements, so you can track performance in real time.

If the buyer refuses a personal guarantee, suggest a stock pledge agreement. Under this structure, the shares of the company are placed in an escrow account. If the buyer defaults on the note or breaches the operational covenants, the ownership of the stock reverts back to you. This gives you the ultimate leverage: the ability to take back control of the business if they mismanage it.

Finally, tie this structure to your EOS® framework. If the business starts missing its financial Rocks or its quarterly budget targets by a certain percentage, that should trigger an automatic acceleration clause. This makes the entire remaining balance of the note immediately due, forcing the buyer to the negotiating table before the business deteriorates completely.