The buyer wants us to carry a large seller note but refuses to include a right to accelerate the payments if they sell the company to another private equity firm. How do we structure a change of control clause to ensure our note is paid in full upon their exit?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a lender, but without the security of a bank. If the buyer decides to flip the company to a secondary buyer before your note is paid off, you face a massive risk of your debt being buried under even more senior leverage. You must insist on a mandatory acceleration clause upon a change of control. This clause must specify that if the buyer sells a majority of the company's assets or equity, your seller note must be paid in full, including all accrued interest, out of the transaction proceeds before any cash is distributed to the buyer's equity holders. If the buyer claims their senior lender will not allow this, negotiate a carve-out that permits the note to be paid off as long as the senior debt is also being retired in the transaction. This is a standard term that any sophisticated buyer should accept. Protect your position by ensuring this covenant is clearly written into the subordination agreement as well as the promissory note. By securing a clear change of control acceleration clause, you ensure that you do not remain a junior lender to a new, unknown sponsor who has no relationship with you.