A buyer is asking us to carry a thirty percent seller note at a below-market interest rate to close the funding gap. How do we structure this seller financing to protect our principal and make sure we actually get paid if the business struggles under new management?

Question

Tyler Smith · Accepted Answer

Accepting seller financing is a standard way to bridge a valuation gap, but it turns you into a junior lender with all of the risk and none of the operational control. To protect your principal, you must negotiate strict covenants in the promissory note that limit the buyer's ability to deplete cash. First, secure the note against the assets of the business with a second-position lien behind the senior bank lender. Next, draft financial covenants that trigger an immediate default if the business falls below a certain debt-service coverage ratio or if the new owners attempt to pay themselves excessive management fees. You also need to retain inspection rights, meaning you can audit their financial books quarterly. In our Step by Step Exit process, we recommend keeping a seat on the advisory board or maintaining an active role in quarterly planning sessions to spot operational red flags early. If the buyer defaults, you need a clear acceleration clause that makes the entire balance due immediately, along with the right to step back in or install a receiver. Do not treat seller financing as a passive investment. It is a highly active risk that requires structural guardrails. If the buyer GWC's their role, they will accept these terms because they believe in their own ability to execute. If they fight these protections, it is a sign they are undercapitalized or uncertain about their own operational plan.