A buyer is asking us to carry a twenty percent seller note to close the gap on valuation, but we are worried about default risk and our lack of control post-close. How do we structure this note and use our operating metrics to protect our downside?

Question

Tyler Smith · Accepted Answer

When a buyer asks you to carry a seller note, they are shifting part of the acquisition risk onto your shoulders. To protect your downside, you must treat this note as a strict commercial loan, not a sign of goodwill. Your primary defense is structuring the note with protective covenants tied directly to your operational metrics.

Start by inserting financial covenants into the promissory note. These covenants should require the buyer to maintain specific debt service coverage ratios and leverage limits. If the business performance dips below these thresholds, it triggers an immediate default, allowing you to take corrective action before the business is run into the ground.

You should also negotiate an acceleration clause. This clause must dictate that if the buyer sells the company or brings on senior debt that exceeds a certain limit, your note becomes due immediately.

To ensure you have visibility, secure a covenant that grants you information rights. This means the buyer must provide you with monthly financial statements and key performance indicators. If your company runs on EOS, you can require them to share the weekly Scorecard. This level of transparency ensures you are never surprised by sudden operational declines.

Finally, secure the note with a personal guarantee from the buyer or a junior lien on the assets of the business. While you will likely be subordinate to their senior bank lender, having a secondary lien still gives you leverage in a restructuring scenario. Do not let the buyer convince you that seller financing is a standard concession. If you are financing their purchase, you must have the rights and protections of an institutional lender.