Since the buyer is requiring us to provide seller financing to get the deal done, we want to capture some of the upside if they successfully scale the business. How do we structure a warrant or equity kicker in our seller note to align our risk with future growth?

Question

Tyler Smith · Accepted Answer

If a buyer insists on you carrying a seller note to bridge their funding gap, you are taking on significant credit risk. If you are going to act as a lender, you should participate in the upside you are helping to fund. You must negotiate equity warrants or a performance kicker to compensate for your risk. Structure your seller note to include warrants that convert into a small percentage of equity in the acquiring entity. If the buyer successfully scales the business or executes a secondary exit in the future, your warrants allow you to capture a slice of that equity growth. Alternatively, build a performance kicker into the note itself. For example, specify that the interest rate on your note increases by a set percentage if the business hits certain post-close milestone targets. You can also negotiate a premium payment if the buyer refinances their senior debt or sells the company before your note matures. Do not accept standard bank terms for subordinated, unsecured risk. By aligning your seller financing with the future success of the business, you turn a potential risk into a lucrative investment that maximizes your overall exit value.