The buyer's offer is at our target valuation, but forty percent of the purchase price is structured as a seller note with a below-market interest rate. How do we evaluate this structural risk and negotiate terms that protect our principal from post-close buyer disputes?

Question

Tyler Smith · Accepted Answer

A large seller note essentially turns you into the buyer's bank, but without the security and covenants that a traditional financial institution would demand. If forty percent of your deal is structured as a seller note, you are taking on significant credit risk, and you must negotiate strict protective terms before signing. First, demand a market-rate interest rate that reflects the subordinated nature of your debt. If the buyer is paying below-market rates, they are reducing your actual net proceeds. The interest rate should compensate you for the risk of being second in line behind their primary senior lender. Second, negotiate tight covenants in the purchase agreement. You must retain the right to inspect the financial records of the business quarterly. If the business falls below certain financial thresholds, or if the buyer attempts to pay out dividends to themselves before your note is satisfied, it should trigger an immediate acceleration of the payment. Finally, eliminate any right of offset. Buyers frequently try to use minor post-close operational issues or alleged representation breaches as an excuse to withhold payments on a seller note. Insist that any dispute over representations must be handled through the general escrow or representation and warranty insurance, not by withholding your principal payments. This keeps your note clean and legally distinct from daily operational arguments.