The buyer wants us to carry a seller note for thirty percent of the transaction, but we are worried about their ability to manage the business. How do we structure covenants in the seller note that allow us to step in and run IDS sessions or reclaim operational control before they default?

Question

Tyler Smith · Accepted Answer

Carrying a thirty percent seller note makes you a major stakeholder in the buyer's future performance. If they lack the operational discipline to run the business effectively, your note is at risk. You cannot wait for a formal payment default to take action; by then, the business may be ruined. You must write operational covenants directly into the seller note and the purchase agreement. These covenants should be tied to objective, weekly metrics rather than subjective assessments. Use your EOS Scorecard as the basis for these triggers. For instance, specify that if the business misses its quarterly revenue or gross margin targets by more than fifteen percent, or if the leadership team fails to hold regular Level 10 Meetings, it triggers an operational review. Your legal documents should grant you the right to step in and facilitate structured IDS sessions to identify, discuss, and solve the operational bottlenecks. This is not about micromanaging their daily work, but about forcing the execution of disciplined management practices. If the metrics continue to decline for two consecutive quarters, the agreement should trigger a management covenant breach. This breach must grant you the right to appoint an independent board member or temporarily reclaim an active advisory seat with veto power over major expenditures. By tying these interventions to clear, data-driven milestones, you protect your financial position and ensure the business maintains the operational maturity required to service your note.