We are offering seller financing to bridge a valuation gap, but we are terrified the buyer will default and we will have to take back a broken business. How do we structure the note and covenants to protect ourselves?

Question

Tyler Smith · Accepted Answer

Seller financing is often the only way to get a deal done, but it should not turn you into an unsecured bank with zero leverage. To protect your capital, you must treat the transaction like an institutional loan. This starts with securing the note against the assets of the business through a first-priority or subordinated security interest and obtaining a personal guarantee from the buyer. You also need to negotiate operational covenants that act as early warning systems before a default occurs. These covenants should include maintaining a minimum debt service coverage ratio, limiting executive compensation, and prohibiting any additional debt without your consent. In addition, you must negotiate the right to receive monthly financial packages, including balance sheets and income statements, just as an active lender would. If the buyer fails to meet these covenants, it should trigger an immediate acceleration of the note or grant you the right to step back onto the board of directors. Within your EOS operating system, this is about ensuring that the person occupying the visionary seat on your Accountability Chart has a clear, documented path to step back into control if the buyer fails to deliver. Do not rely on trust alone. Structure the note with teeth so that a default gives you immediate legal and operational recourse before the business value is destroyed.