The buyer is asking us to carry a thirty percent seller note, but we are worried they will abandon our core operating model and ruin the company's cash flow. How do we structure the promissory note to give us a right of offset or acceleration if they fail to maintain our established operational standards?

Question

Tyler Smith · Accepted Answer

Carrying a thirty percent seller note means you are effectively acting as the buyer's bank, but without a bank's regulatory leverage. If the buyer steps in, abandons your operating system, and mismanages the business, the cash flow supporting your note will dry up. You need to build operational covenants directly into the promissory note to protect your position. Start by requiring the buyer to maintain specific financial covenants, such as a minimum debt service coverage ratio. More importantly, build in operational covenants. Specify that the company must maintain its core operating processes and key leadership roles as defined in your current Accountability Chart. If the buyer breaches these covenants, your promissory note must include a right of offset. This allows you to claw back equity or accelerate the outstanding balance immediately. You can also negotiate a provision where a covenant breach triggers an automatic increase in the interest rate on the note. Keep track of these metrics through a monthly reporting requirement. If the buyer fails to deliver these reports, it should trigger an immediate default. This gives you the leverage to step in and protect your legacy before the buyer can dismantle the operational efficiency that created the business's value in the first place.