We are agreeing to carry a substantial seller note, but we are worried the buyer will starve our physical and digital infrastructure of necessary capital expenditures to pay down their senior debt. How do we write specific minimum capital expenditure covenants into our seller note to protect the long-term value of the collateral?

Question

Tyler Smith · Accepted Answer

When you provide seller financing, you are betting on the buyer's ability to maintain the health of the business. A common mistake is allowing the buyer to strip cash out of the company to service their senior bank debt or pay themselves distributions, while neglecting the physical and digital infrastructure. This starves your collateral of the necessary nourishment to survive.

To prevent this, you must write strict minimum capital expenditure covenants directly into the seller note or purchase agreement. These covenants should define a baseline annual reinvestment rate for your technology, software licenses, equipment, and facilities, based on your historical operational needs.

Tie these covenants to your documented operational processes. For example, specify that the buyer must maintain your current software subscriptions and automated system integrations at their existing operational levels. This ensures they do not cut corners by canceling the critical platforms that drive your team's efficiency.

If the buyer falls below these minimum capital expenditure thresholds, it should trigger an automatic default under the seller note, allowing you to accelerate the outstanding principal or increase the interest rate. Protecting the operational integrity of the business post-sale is the only way to guarantee your note is paid in full.