The buyer is pushing for a thirty percent seller note to close our funding gap, but they refuse to give us any board oversight or operational covenants post-close. How do we structure this seller financing so we do not lose control over the cash flow that is supposed to pay us back?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a junior lender, but without the institutional protections of a bank. If the buyer runs the business into the ground, your note becomes worthless. To protect your cash flow, you must negotiate specific protective covenants directly into the note and the purchase agreement. Do not settle for a passive position. Start by requiring monthly financial reporting packages, including their updated EOS® Scorecard and financial statements, so you have early warning signs of operational decay. You must also negotiate acceleration clauses. If the business falls below a specific debt service coverage ratio or if they miss two consecutive payments, the entire remaining balance of the note must become immediately due. Furthermore, restrict their ability to pay out distributions to equity holders or pay management fees to a parent entity if they are not in compliance with your note covenants. Finally, ensure your note is secured by a junior lien on the assets of the business. While senior bank debt will always take priority, having a secondary security interest prevents the buyer from stripping assets or refinancing without your consent. Your goal is to remain an active monitor of the business health, utilizing the clear operational metrics you established running on EOS®, without interfering in daily management.