The buyer wants us to carry a large seller note but refuses to give us a seat on the board. How do we use operational covenants and financial triggers to accelerate the note if they diverge from our V/TO and tank the business?

Question

Tyler Smith · Accepted Answer

Accepting a seller note means you are acting as a bank, and you must protect your position. If the buyer refuses to grant you a board seat, you can protect your investment by embedding strict negative covenants and operational triggers directly into the note and the purchase agreement. These covenants should restrict the buyer's ability to take certain actions without your prior written consent.

Specifically, limit their ability to issue new debt that ranks senior to your note, prevent them from distributing cash dividends to their shareholders, and cap executive compensation increases. Operationally, you can tie default triggers to their adherence to the operational standards that built the company. Require them to maintain a set level of working capital and debt service coverage.

You can also negotiate a provision where any material deviation from the core operational strategy outlined in your historical V/TO, such as divesting key product lines or firing the leadership team, constitutes an immediate event of default. If a default occurs, the interest rate on your note should automatically step up by several percentage points, and you must have the right to accelerate the entire unpaid balance. This ensures that even without a formal board seat, you maintain operational guardrails that protect your capital and force the buyer to run the company responsibly.