The buyer wants us to carry a seller note for twenty percent of the purchase price, but they are refusing to provide a personal guarantee or collateral. How do we structure the seller note to secure our position without killing the deal?

Question

Tyler Smith · Accepted Answer

If a buyer refuses to provide personal guarantees or hard collateral for a seller note, you are essentially providing unsecured debt to a company you no longer control. To protect your interest without walking away from the table, you must build security through operational covenants and governance rights.

Start by negotiating a spring-back board seat or observer rights. If the buyer misses a payment or violates a financial covenant, you must have the right to sit in on their leadership meetings. This allows you to see operational problems before they turn into a default.

Next, implement strict financial covenants in the note. These should include minimum debt service coverage ratios and maximum leverage ratios. If the business violates these metrics, the note should trigger an automatic default, giving you the right to accelerate the payments.

You should also negotiate a negative pledge. This prevents the buyer from taking on additional senior debt or pledging the company's assets to another lender without your written consent.

Finally, ensure that the subordination agreement with the buyer's primary bank allows for the continued payment of your interest and principal as long as the senior loan is not in default. Do not agree to a complete standby note where you receive nothing for years. If they want you to act like a partner by carrying paper, they must treat you like a secured creditor in the contract.