We are being pushed to accept a seller note for fifteen percent of the transaction value, but we feel we are taking on equity-level risk for a low debt-level return. How do we structure warrants or equity kickers into our seller financing package to ensure we are fairly compensated if the buyer hits their growth projections?

Question

Tyler Smith · Accepted Answer

Accepting fifteen percent of your transaction value as a seller note means you are acting as a junior lender, taking on significant risk without the upside. If the buyer fails, the senior bank gets paid first, and you are left with nothing. To balance this risk, you must negotiate for warrants or equity kickers that convert your debt into equity if the buyer hits their growth targets or goes through a subsequent recapitalization. This structure ensures that if you are taking on equity-like risks, you are positioned to reap equity-like rewards. To make this work, the purchase agreement should define specific operational milestones based on your existing strategic goals. You can tie these milestones directly to the quarterly targets established in your V/TO. If the buyer achieves these growth milestones, your warrants trigger, allowing you to participate in the enterprise value creation you helped set up. Additionally, you should negotiate for a board observer seat or a formal seat on their advisory board to maintain visibility. By using your experience to keep their leadership team aligned, you help ensure they execute their plans. Do not accept flat interest rates on a seller note when you can structure a deal that rewards your patience with a real slice of the future upside.