The buyer wants us to carry a seller note for thirty percent of the purchase price, but we are worried that inflation and fluctuating interest rates will erode the real value of our payout over five years. How do we structure this note to protect our capital without making the debt unserviceable?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are effectively acting as the bank, which means you must protect your purchasing power. To guard against inflation and interest rate risk over a five-year term, you should avoid a fixed-rate structure. Instead, propose a floating interest rate pegged to a reliable benchmark, such as the prime rate plus a defined margin. To prevent the debt from becoming unserviceable during high-inflation cycles, you can structure a cap and a floor on the interest rate. This ensures you have a guaranteed minimum return while giving the buyer a predictable worst-case scenario. Another solid approach is to structure the principal payments with an annual inflation adjustment based on the Consumer Price Index. If you go this route, you can offer the buyer a lower initial interest rate in exchange for the inflation adjustment. This keeps their initial cash outflows manageable while protecting your principal value. From an operational standpoint, verify the buyer has a clear plan to hit their financial targets. You want to see their projected debt service coverage ratio. Make sure your seller note has senior or secondary security interests in specific company assets. Do not agree to stand behind multiple layers of institutional debt without some form of personal guarantee or collateral. Protect your downside first, then structure the interest to match the risk you are taking.