The buyer is asking us to carry a large seller note at a below-market interest rate, claiming their senior lender will not allow a higher cash outflow. How do we structure a warrants package or an equity conversion kicker to offset this cheap debt and capture our fair share of the upside if they successfully scale the business?

Question

Tyler Smith · Accepted Answer

When a buyer claims their senior bank covenants restrict them from paying a market interest rate on your seller note, you do not have to accept a low-yielding asset. Instead, use structured deal engineering to bridge the gap by incorporating a warrants package or an equity conversion kicker into the seller financing agreement. This structure keeps the initial cash interest payments low enough to satisfy the senior lender while positioning you to capture significant upside as the business scales. Negotiate a warrant agreement that grants you the right to purchase a specified percentage of the buyer's equity at a nominal price, which you can exercise upon a subsequent sale of the company or after a set period. Alternatively, structure the seller note as convertible debt, allowing you to convert the outstanding principal into common or preferred equity at a predetermined valuation if the buyer achieves specific growth milestones. To protect your position, ensure your convertible note includes anti-dilution provisions and robust information rights, giving you visibility into their financial performance. By using these equity-based mechanisms, you transform a cheap, risky loan into a high-yield investment. This alignment of interests encourages the buyer to run the business efficiently, potentially utilizing EOS processes to drive the enterprise value up, which directly increases the ultimate value of your equity kicker.