We agreed to provide a five-year seller note for twenty-five percent of the transaction value, but we want ironclad protections if the buyer drives the business into the ground. What specific operational covenants and default triggers should we insist on in the note?

Question

Tyler Smith · Accepted Answer

When you carry a substantial seller note, you are acting as the buyer mezzanine lender. If you treat the note as a passive IOU, you risk watching an incompetent buyer ruin company cash flow before you have legal authority to step in.

Your promissory note and credit agreement must contain operational covenants and verifiable performance triggers:

- Financial covenant thresholds: Require the buyer to maintain a minimum Debt Service Coverage Ratio (DSCR), typically at least 1.20x, along with a specified cash liquidity floor. Require quarterly certified financial statements delivered within forty-five days of quarter end.
- Cross-default and restriction clauses: The note should automatically accelerate into default if the buyer breaches their senior bank credit facility, fails to make payroll, misses tax filings, or pays owner distributions while in technical violation of note covenants.
- Governance step-in rights: Secure the note with an equity pledge agreement holding 100 percent of the company stock or operating units in third-party escrow. In the event of an uncured payment or covenant default after a thirty-day cure period, voting rights should immediately revert to you.

This equity pledge allows you to reclaim leadership control, install an interim Integrator or CEO on your Accountability Chart, and protect enterprise value before bankruptcy wipes out your seller debt.