The buyer is demanding that we carry a twenty percent seller note to keep skin in the game, but we are worried about their ability to pay it back if they mismanage our operations. How do we structure a seller financing note to protect our principal and guarantee we actually collect?

Question

Tyler Smith · Accepted Answer

Seller financing is a standard tool to bridge valuation gaps, but you must treat it like a bank loan, not a sign of goodwill. To protect your principal, the note must include strict protective covenants. Demand a personal guarantee from the buyer or hold a security interest in the stock or assets of the business. If the buyer defaults on a payment, you need a mechanism to step back in and reclaim operational control.

Structure the note with an acceleration clause. This clause dictates that if the business is sold again, or if certain financial thresholds are missed, the entire remaining balance becomes due immediately. You should also negotiate a subordination agreement with the buyer senior lender that still allows you to receive monthly interest payments as long as the senior loan is not in default.

Tie your protective covenants to the operating metrics you know best. Use your history with the EOS process to define these boundary lines. For example, you can require the buyer to maintain a minimum current ratio or debt service coverage ratio. If they fail to meet these metrics on their quarterly balance sheet, it triggers a technical default, giving you the leverage to intervene before the business is run into the ground.