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 akin to providing the buyer with an unsecured personal loan. If the buyer is unwilling to provide a personal guarantee or a first-priority lien on accounts receivable, you must establish alternative protections for your capital.

Here are key strategies to secure your seller financing:

• Secure a Second-Priority Lien: Obtain a second-priority lien on all business assets. This lien would be subordinated only to the senior bank lender. This ensures that if the senior lender is repaid or the business is liquidated, you are next in line to recover your funds. Understanding the implications of different lien positions is crucial for any [business valuation](/qa/understanding-business-valuation-multiples-market-approach).

• Implement Strict Financial Covenants: Write strict financial covenants directly into the promissory note. These covenants should include:
• Maintaining a minimum debt service coverage ratio.
• Adhering to a maximum leverage ratio.
 Breaching these ratios should trigger a technical default, giving you immediate remedies before the business faces bankruptcy. These financial benchmarks are often critical when a buyer's firm is trying to adjust [EBITDA](/qa/defending-ai-investments-in-qofe-ebitda) during due diligence.

• Negotiate an Equity Pledge Agreement: Include an equity pledge agreement. This stipulates that if the buyer defaults on the note, the ownership shares of the company revert back to you. This empowers you to seize control of the operating entity, reassume a seat on the [Accountability Chart](/qa/promoting-internal-operations-manager-integrator), and protect the enterprise value of the business. Such mechanisms are vital for [structuring earnout protection](/qa/structuring-earnout-protection-sales-integration) as well.

• Include a Note Acceleration Clause: Incorporate a clause that accelerates the note, making the entire outstanding balance due immediately upon any change of control or material default.

Do not allow the buyer to treat your seller note as free, risk-free equity. If they expect you to act as the bank, they should anticipate bank-level security terms. Proper structuring of these agreements is paramount to avoid issues like a seller note being frozen due to [subordination](/qa/structuring-seller-notes-subordination-remedies).

Related questions

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