The buyer is offering a high valuation but wants fifteen percent in a seller note with zero interest and a five-year balloon, leaving us with zero leverage if they run the company into the ground. How do we structure operational covenants or veto rights to protect our note?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a junior lender without a bank's institutional leverage. If the buyer wants you to finance their acquisition, they must accept that you have a vested interest in the operational health of the company until that note is paid in full. To protect your capital, you must negotiate negative covenants in the purchase agreement that trigger an immediate acceleration of the note if violated. Demand these three specific protections:
- Veto power over major capital allocations, including executive compensation, additional senior debt, and equity distributions.
- Quarterly financial reporting with direct access to balance sheets and income statements.
- A board observer seat or monthly operational check-in rights.
By using the Trust Creation Process from the Trusted Advisor Fieldbook, you can frame this not as a lack of trust, but as a mutual alignment of risk. You are lowering their cash-at-close requirement, so they must lower your risk by maintaining operational transparency. If they refuse these basic protections, their self-orientation is too high, and you should walk.