The buyer is asking us to carry a twenty percent seller note to close our deal, but they are refusing to grant us a personal guarantee, claiming their private equity fund structure prevents it. How do we structure alternative covenants in the note to protect our principal without relying on a personal guarantee?

Question

Tyler Smith · Accepted Answer

When dealing with a private equity buyer who refuses to sign a personal guarantee, you must build protection directly into the operating covenants of the business. Since you cannot chase an individual sponsor for the money, you must ensure the cash remains inside the operating entity to service your note. First, negotiate a strict restriction on distributions. The buyer must be contractually prohibited from paying out dividends, management fees, or sponsor fees to their fund investors if your monthly interest or principal payments are not fully current, or if the debt service coverage ratio falls below a specific multiplier.

Second, insist on a senior debt acceleration trigger. If the buyer defaults on their primary bank loan, your note must immediately accelerate and become due, giving you a seat at the table during any restructuring. You should also demand board observer rights or a seat on their post-close advisory board. This allows you to monitor their operational decisions and ensure they are running the company on a sound operating system. By limiting their ability to pull cash out of the company and keeping a close eye on their financial hygiene, you create a robust structure that protects your seller financing without needing a personal guarantee.