We are being asked to accept a seller note where the buyer is a search fund backed by a searcher with no operating history. How do we structure the collateral and default provisions so we do not lose both our business and our cash if they fail to operate it?

Question

Tyler Smith · Accepted Answer

When you accept a seller note from an inexperienced buyer, you are not just financing a transaction, you are betting on their operational competence. To protect your hard-earned equity, you must negotiate strict default and governance terms.

Do not settle for a standard corporate guarantee from a newly formed shell company. Insist on a personal guarantee from the sponsor or searcher, or secure a junior lien on the assets of the business.

Structure the loan agreement with clear operational covenants. For example, if the company falls below a specific debt service coverage ratio or if their quarterly financial performance drops by a certain percentage, it triggers a technical default.

Your default remedies must include the immediate right to appoint an observer to their board or executive committee. In a worst-case scenario, you should have a path to reclaim equity or regain operational control of the business before they run it into the ground.

Tie these covenants to your legacy metrics. You can require them to maintain the weekly Level 10 Meeting and keep track of key scorecard metrics that you established. This keeps the business grounded in the operational discipline that built its value in the first place.