The buyer wants us to carry a seller note but is refusing to provide a personal guarantee, claiming their corporate entity has plenty of assets. How do we audit their corporate structure to verify this, and what alternative security measures should we demand?

Question

Tyler Smith · Accepted Answer

Never accept a seller note from a shell company or a newly formed acquisition entity without solid security. If the buyer refuses a personal guarantee, you must look closely at their corporate structure. Demand a detailed organizational chart showing all parent companies, subsidiaries, and sister entities. You must identify where the actual operating assets and cash reserves are held. If the buying entity is simply a holding company with zero operations, a note secured only by that entity is virtually worthless in a default. To protect yourself, demand a parent-company guarantee, which binds the larger, asset-rich parent entity to your debt. You should also secure a first-priority lien on the accounts receivable or intellectual property of the operating business. Write covenants into your purchase agreement that prevent the buyer from transferring assets, paying dividends to investors, or taking on additional senior debt without your approval as long as your note is outstanding. Use your weekly Scorecard metrics to monitor their cash flow coverage ratio quarterly. If they refuse these protections, they are asking you to take equity-like risk without equity-like returns.