Our leadership team wants to buy the company through an internal management buyout, but they have minimal capital and need us to carry an eighty percent seller note. How do we structure the debt service, amortization schedule, and equity transfer so the business remains solvent while protecting our retirement?

Question

Tyler Smith · Accepted Answer

Carrying an eighty percent seller note for an internal buyout carries substantial operational risk if cash flow tightens. To protect both parties, structure the transaction around debt service coverage rather than an arbitrary calendar timeline. Set the amortization schedule over seven to ten years, but incorporate a five-year balloon payment or refinancing requirement once the team builds sufficient balance-sheet equity. Ensure the debt service coverage ratio stays at or above 1.35x after fully burdened management compensation.

Use the EOS Accountability Chart to verify that the successors truly Get It, Want It, and have the Capacity (GWC) to lead without you. Tie the note covenants to operational discipline: require monthly Level 10 Meetings, quarterly Scorecard reviews, and annual budget approvals where you retain board observation rights. Include an equity pledge agreement where the team's purchased shares serve as collateral, automatically reverting back to you upon an uncured payment or covenant default.

Do not transfer full voting control immediately. Consider a tiered structure where voting shares vest in tranches as principal milestones are satisfied, or issue non-voting common stock alongside a preferred return. Ensure the interest rate sits slightly above the Applicable Federal Rate to satisfy the IRS, with a payment-in-kind toggle that capitalizes interest to principal if seasonal cash flow drops below predefined safety thresholds. This keeps the company out of technical default while keeping the leadership team accountable to financial realities.