The buyer is requiring us to carry a twenty percent seller note to close the valuation gap, but they plan to replace our leadership team immediately. How do we structure this seller financing to ensure we actually get paid if the new management team fails to run the operations effectively?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are investing in the buyer's ability to execute. If they swap out your leadership team, your risk sky-rockets. To mitigate this risk, you must demand structural and operational covenants in the seller note that protect your position. First, negotiate a covenant that restricts major changes to the leadership team or the Accountability Chart without your consent, or at least accelerates the maturity of the note if those changes occur. Second, establish clear financial covenants. The note must include provisions that prevent the buyer from taking distributions, paying management fees to their equity sponsors, or raising additional senior debt if the business drops below a specified debt service coverage ratio. You must also secure the note with a junior lien on the business assets and personal guarantees from the buyer's principals. If the buyer refuses these terms, they are asking you to take equity-level risk with debt-level returns. Use your documented operating systems to show them that your current leadership team is the engine driving the cash flow that pays the note. Protecting your seller financing is about keeping the operational wheels on the wagon until your check clears.