The buyer wants a seller note but is refusing to provide a personal guarantee or place a lien on the company's accounts receivable. How do we structure the security agreements and default remedies to protect our money without blowing up the deal?

Question

Tyler Smith · Accepted Answer

Accepting a seller note without security is essentially giving the buyer an unsecured personal loan. If the buyer refuses a personal guarantee or a first-priority lien on accounts receivable, you must establish alternative guardrails to protect your capital. First, secure a second-priority lien on all business assets, subordinated only to the senior bank lender. This ensures that if the senior lender is paid off or the business is liquidated, you are next in line. Second, write strict financial covenants into the promissory note. These covenants should include maintaining a minimum debt service coverage ratio and a maximum leverage ratio. If the buyer breaches these ratios, it triggers a technical default, giving you immediate remedies before the business goes bankrupt. Third, negotiate an equity pledge agreement. If the buyer defaults on the note, the ownership shares of the company revert back to you. This allows you to seize control of the operating entity, step back into your seat on the Accountability Chart, and protect your enterprise value. You should also include a clause that accelerates the note, making the entire outstanding balance due immediately upon any change of control or material default. Do not let the buyer treat your seller note as free, risk-free equity. If they want you to act as the bank, they must expect bank-level security terms.