We are being forced to accept a seller-financed note for twenty-five percent of the transaction value, and the buyer is refusing to give us a personal guarantee. What specific operational milestones or governance rights can we write into the note to protect our capital if the company's post-sale performance deteriorates?

Question

Tyler Smith · Accepted Answer

Accepting a seller-financed note without a personal guarantee is risky, but you can protect your capital by embedding operational covenants and governance rights directly into the note, using your EOS operating metrics as early warning systems. Rather than relying solely on backward-looking financial covenants, build your covenants around the leading indicators that keep the business healthy.

Start by linking your default triggers directly to the Accountability Chart and the leadership team. You should specify that any departure of key leadership team members who have GWC™, which means they Get it, Want it, and have the Capacity to do the job, constitutes an immediate event of default unless they are replaced within forty-five days with candidates you approve.

Next, write covenants tied to your operational scoreboard. If the company's average weekly scorecard metrics fall below eighty percent of their targets for two consecutive quarters, this should trigger an automatic consultation period where you gain observer rights on the board of directors. If performance drops further, you must have the right to step back in, suspend the buyer's management fees, or accelerate the note.

Finally, ensure the note contains a negative covenant preventing the buyer from taking out subordinated distributions or paying bonuses to themselves if they are not meeting the note payments. By tying the security of your seller note to the operational discipline of the business, you protect your exit proceeds from a buyer who does not know how to run your business post-close.