We are being asked to carry a major seller-financed note, and we are worried the buyer will mismanage the company and destroy its value before paying us. How do we structure our seller note covenants using our EOS operational metrics to trigger an immediate default if performance drops?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a bank, but without a bank's scale. If the buyer mismanages your former business, you risk holding an unsecured note from an insolvent entity. To mitigate this risk, you must tie your seller note covenants directly to operational reality, not just backward-looking annual financial statements.

Use your existing EOS® operational structure to protect your position. Write specific financial and operational covenants into the promissory note using the key performance indicators from your historical Level 10 Meeting™ scorecard. For instance, define covenants based on minimum trailing twelve-month gross margin, employee retention thresholds, and client concentration limits.

If the buyer fails to maintain these metrics for two consecutive quarters, it must trigger an immediate technical default. This default should grant you specific rights, such as accelerating the note balance, increasing the interest rate, or exercising a board observer right. Most importantly, structure a management carve-back provision. If a default occurs, you must have the legal right to step back into an advisory or management role to protect the asset.

Ensure your former leadership team is still aligned using the Accountability Chart. If the buyer replaces key people who had the GWC™ for their roles, it should also trigger a covenant review. By anchoring your note covenants in practical, weekly operational metrics rather than loose accounting definitions, you create an early warning system that protects your unpaid equity before the business goes under.