The buyer is proposing a deal structure where a quarter of the purchase price is a seller note, but they are refusing to include any collateral or acceleration clauses. How do we structure our default remedies in the seller financing agreement to protect ourselves without killing the deal?

Question

Tyler Smith · Accepted Answer

Accepting a seller note for twenty-five percent of your purchase price without strong default remedies is an unacceptable risk. If the buyer defaults on their payments, you cannot rely on goodwill to recover your money. You must negotiate a clear, enforceable set of protective covenants that trigger immediately upon a payment default. While senior lenders will almost always refuse to let you seize voting control of the company or foreclose on assets ahead of them, you can still negotiate powerful remedies that do not violate senior subordination terms. First, insist on a standard acceleration clause. This clause must state that if the buyer misses a payment and fails to cure it within a brief grace period, the entire outstanding balance of the note becomes immediately due and payable. Second, negotiate for an automatic interest rate step-up. If the buyer defaults, the interest rate on your seller note should immediately increase by a significant penalty percentage, such as five to eight percent, until the default is fully cured. This imposes a direct, painful financial cost on the buyer for ignoring their obligations. Finally, require the buyer to provide regular operational updates, including their monthly financial statements and compliance certificates. Use this financial data to track their performance against the covenants in your note. By monitoring their operational health, you can identify potential cash flow issues early and initiate structured discussions before a default occurs, protecting your deferred proceeds.