We are offering a significant seller note to help the buyer fund the transaction, but we want to make sure we have visibility into their financials post-close so we can spot trouble early. What specific financial reporting covenants should we demand in the seller note to maintain oversight without overstepping our role as a creditor?

Question

Tyler Smith · Accepted Answer

When you carry a seller note, you are acting as a junior lender to your own former business. To protect your investment, you must negotiate clear financial reporting covenants in the purchase agreement that give you ongoing visibility into the financial health of the business. You need this data to spot early warning signs of operational distress before they turn into a default on your note.

Your seller note should require the buyer to deliver regular financial packages within a strict timeframe. Demand the following reporting covenants:
- Monthly balance sheets, income statements, and cash flow statements within fifteen days of month-end.
- Annual audited or reviewed financial statements within ninety days of the fiscal year-end.
- Compliance certificates signed by the chief financial officer confirming the buyer is in compliance with all senior bank covenants and the seller note covenants.
- Immediate notification of any material adverse change or any event of default under their senior credit facility.

By securing these rights, you can input their key financial metrics into a simplified version of your old EOS Scorecard. This allows you to monitor their cash conversion cycle and debt service coverage ratio. If the metrics drop below your agreed thresholds, you have the right to trigger an informational meeting, giving you a chance to address issues through structured problem solving before a formal default occurs.