A family office buyer wants us to provide seller financing for fifteen percent of the purchase price, but they refuse to give us a personal guarantee. What specific financial covenants and operational trigger points must we embed in the promissory note to protect our position?

Question

Tyler Smith · Accepted Answer

When dealing with a family office that refuses a personal guarantee, you are taking on concentrated equity-like risk with only debt-like upside. To protect your fifteen percent seller note, you must use tight operational and financial covenants that act as early warning systems. Start by establishing a debt service coverage ratio covenant. This requires the business to maintain a specific multiple of cash flow relative to its debt obligations. If they dip below this ratio, it constitutes a technical default, giving you immediate leverage to intervene. Next, embed operational triggers based on the health of the leadership team. Specify that any major changes to the key seats on the Accountability Chart, such as the Integrator or the head of sales, require your prior written consent as long as the note remains unpaid. This prevents the buyer from replacing your highly capable team with incompetent cheap labor. Additionally, you must restrict cash distributions. The note should forbid the family office from taking dividends, management fees, or tax distributions out of the business if those payments would cause a default or if the business is failing to hit its quarterly targets. Finally, mandate that the business continues to run on a structured operating system with clear quarterly Rocks and a weekly Scorecard. Insist on receiving these operational reports monthly. If the leading indicators start trending downward, you will know months before a payment is missed, giving you the runway to solve the issue or accelerate the note.