The buyer wants us to hold a twenty percent seller note to close the funding gap, but we are worried about their ability to manage the business post-closing. How do we structure the note covenants to protect our money without getting dragged back into daily operations?

Question

Tyler Smith · Accepted Answer

Holding a seller note always places you in the position of a junior lender, meaning you carry real risk without the operational control to mitigate it. To protect your capital without getting dragged back into the business, you must build strict financial and operational covenants directly into the note agreement.

First, secure the note with a secondary lien on the company's accounts receivable and physical assets. While the senior lender will demand priority, having a junior lien ensures you are at the table if things go sideways.

Second, write in negative covenants that restrict the buyer's actions. These should include strict limits on executive compensation, a prohibition on taking on additional senior debt without your consent, and a restriction on paying out dividends to new shareholders until your note is fully paid.

Third, demand monthly financial reporting. You do not want to find out the business is failing when a payment bounces. Tie the note to operational benchmarks. If the business falls below a certain debt service coverage ratio, it must trigger an automatic interest rate step-up or accelerate the maturity date.

Finally, keep your EOS Accountability Chart intact through the transition. If key leadership roles are abdicated or replaced with unqualified personnel, that should trigger a technical default. This structures the transition so you can walk away cleanly, confident that the operational framework that generated your wealth remains in place to secure your payout.