Current as of: April 4, 2026. This article reflects legal and regulatory authorities, administrative guidance, and market practice available as of the date above. Rules, thresholds, agency guidance, and administrative practice may change after that date, and the analysis may not apply the same way to every set of facts.
Seller Financing in Cross-Border M&A: Structuring Promissory Notes to Improve Enforceability and Recovery
In cross-border M&A between Mexico and the U.S., seller financing can create significant enforcement and recovery risk if the note, collateral package, guarantees, and priority arrangements are not structured carefully. The difference between a well-documented note and a loosely documented note can materially affect leverage, recovery options, and timing.
Key Points
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Promissory note fundamentals-principal, interest rate, maturity, amortization schedule, and acceleration clauses-determine whether you can recover when the buyer fails to pay.
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Security interests on US assets require UCC-1 filing in the correct state (debtor's location governs) while Mexican movable assets require registration in the Registro Único de Garantías Mobiliarias (RUG) and Mexican real property mortgages (hipotecas) require registration in the applicable Registro Público de la Propiedad to bind third parties.
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Personal or entity guarantees in cross-border deals create additional collection paths but introduce complexity around which entity actually guarantees and under what governing law.
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Intercreditor and subordination agreements with bank lenders force difficult negotiations about recovery priority and may require seller financing to step behind institutional debt.
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Cross-border enforcement of a U.S. monetary judgment in Mexico generally requires a separate recognition and enforcement proceeding before the competent Mexican court, adding cost and delay that can materially affect net recovery.
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Interest withholding under the US-Mexico income tax treaty (Article 11) and applicable domestic law creates tax obligations on both sides that affect net recovery and cash flow planning; the applicable rate depends on the treaty, beneficial ownership, and documentation.
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Absence of documented security arrangements leaves sellers with an unsecured claim against the buyer's assets, competing equally with trade creditors and leaving recovery to bankruptcy procedures.
I. The Promissory Note: Non-Negotiable Core Elements
A. Principal, Term, and Amortization
The promissory note names the principal amount, maturity date, and amortization schedule. Avoid vague "as agreed" language. State whether the note amortizes equally over the term or balloons at maturity. State whether prepayment is permitted and whether prepayment carries a penalty.
The maturity date controls when the buyer's obligation becomes due. In cross-border deals, maturity typically runs 3 to 7 years post-closing, with amortization that does not exceed the buyer's projected cash flow from the acquisition. Set maturity too short and the buyer cannot service the obligation. Set amortization too slow and your security interests may not be sufficient to cover full recovery if the buyer defaults in year three.
B. Interest Rate and Accrual
State the interest rate in basis points or as a fixed percentage. Specify whether interest accrues daily, monthly, or annually. Specify whether unpaid interest compounds or accrues separately.
The interest rate should be negotiated in light of commercial benchmarks, the buyer's credit risk, and the transaction's tax consequences, including any applicable withholding or imputed-interest rules. A 5% note payable by a U.S. obligor to a Mexican resident seller may yield less on a net basis after any applicable U.S. withholding, home-country taxation, and treaty/documentation effects. Price the note to account for this friction.
C. Acceleration and Default
The note should clearly specify the events that may trigger acceleration.
Acceleration clauses are not ceremonial. They convert a multi-year receivable into a demand obligation instantly. Weak acceleration language (e.g., "upon material default") creates litigation risk about whether default actually occurred. Use objective triggers where possible.
II. Security Interests in US Assets: UCC Article 9 Mechanics
A. Creation and Perfection
UCC Article 9 governs the creation, perfection, and priority of security interests in personal property, fixtures, and accounts. A security interest is created by agreement (the security agreement) and attaches when three conditions are met: the secured party gives value, the debtor has rights in the collateral, and the debtor signs the security agreement (with exceptions for possession and control).
Attachment alone does not perfect a security interest. Perfection requires filing a UCC-1 financing statement in the correct public office. The governing law for perfection depends on the debtor's location. If the buyer is incorporated in Delaware, file in Delaware. If the buyer is a Wyoming LLC whose managing member resides in California, file in Wyoming (the state of formation controls for entities). Filing in the wrong state leaves the security interest unperfected and subordinate to judgment creditors and bankruptcy trustees. For non-US entities and individuals, UCC Section 9-307 provides specific rules for determining debtor location. Filing in the wrong jurisdiction may impair perfection of the security interest.
B. Collateral and Priorities
As a seller, you want security in the acquired business's assets. Common collateral includes accounts receivable, inventory, equipment, and intellectual property of the target. The UCC-1 should describe collateral as "all assets of the debtor" or "all equipment, fixtures, and general intangibles" depending on your negotiating position.
The filing creates a public record. As a general matter, priority among competing Article 9 security interests in the same collateral often follows the first-to-file-or-perfect rule, subject to important exceptions such as control-based collateral, PMSIs, possessory interests, and subordination arrangements. If the bank has a purchase-money security interest in inventory or equipment (granted as part of the acquisition financing), the bank may have priority in those assets despite your filing date. Intercreditor agreements (discussed below) resolve these conflicts.
III. Security Interests in Mexican Assets: Prenda and Registro Publico
A. Pledge (Prenda) and Registration
Mexican law provides several security mechanisms for movable assets, including in particular the prenda sin transmisión de posesión and, in some transactions, a fideicomiso de garantía; the appropriate structure depends on the asset class and transaction. A Mexican movable-asset security interest must comply with the applicable statutory formalities for the chosen security device, and registration in the Registro Único de Garantías Mobiliarias (RUG) is generally key to opposability against third parties; whether notarization or ratification before a notary is required depends on the instrument and collateral.
The prenda does not require the creditor to take physical possession of the collateral. This is practical for operating businesses where the debtor must retain possession to conduct operations. The agreement must specify the obligation secured, the collateral, and the date of maturity. For registrable Mexican movable security interests, priority is often materially affected by the order and effectiveness of registration in the RUG, but priority must be analyzed under the specific security instrument, collateral type, and applicable Mexican law.
B. Perfection Through the RUG
For registrable Mexican movable security interests, registration in the RUG is generally required to make the security interest opposable against third parties. The RUG generally follows a time-based priority logic for registrable interests, but the Mexican regime is not identical to Article 9 and priority must be analyzed under the specific security instrument and applicable Mexican law.
RUG is an electronic federal registry for certain movable security interests. Registration mechanics, timing, and ancillary formalities depend on the transaction documents and filer access; parties should not assume state-based timelines or percentage-of-debt registry costs. Once registered, the security interest is generally effective against the buyer's creditors, bankruptcy trustees, and subsequent creditors.
For real property in Mexico, a mortgage (hipoteca) must be executed in the required form before a Mexican notary and registered in the applicable Registro Público de la Propiedad in the state where the property is located to be effective against third parties.
C. Cross-Border Complications
A single buyer entity may have assets in both the U.S. and Mexico. Protection across both jurisdictions requires the appropriate U.S. filings and the appropriate Mexican security documents and registrations for the relevant asset class, such as RUG registration for qualifying movable collateral or Registro Público de la Propiedad registration for real-property mortgages. Failure to register in either jurisdiction leaves that jurisdiction's assets unprotected.
Enforcement is jurisdiction-specific. A UCC-secured party in the US can foreclose through repossession and sale (with notice). Enforcement of Mexican security interests depends on the type of collateral and the security instrument; under Mexican law, enforcement of security interests typically requires judicial processes governed by the applicable commercial or civil procedure codes, unless the security instrument includes provisions for alternative enforcement mechanisms. These are separate proceedings with separate costs and timelines.
IV. Subordination, Intercreditor Agreements, and Bank Debt
A. The Subordination Problem
When the buyer finances the acquisition with a bank loan, the bank typically insists on a first-priority security interest in the business assets. This creates a conflict: you want first priority to ensure recovery, the bank wants first priority to ensure recovery, and both of you cannot be first.
An intercreditor agreement is one mechanism used to allocate lien priority and enforcement rights among creditors. In many transactions, the seller agrees by contract to subordinate whatever priority it might otherwise have to the bank lender. In return, the agreement may provide the seller with notice rights, limited consultation rights, cure rights, or negotiated carve-outs from the collateral package or waterfall. In many senior/subordinated structures, the senior lender is paid first from shared collateral unless the parties expressly negotiate a different arrangement.
Intercreditor negotiations are often heated because they force the seller to accept subordinated status. A seller note subordinated to a $3M bank loan means that if the business is worth $2M at default, the bank is paid in full and the seller receives nothing. This is a material economic concession.
The seller should negotiate for: (1) carve-outs where the seller's lien is not subordinated (e.g., real property or specific asset classes), (2) limited standstill periods, notice rights, cure rights, or release constraints, or (3) payment and collateral baskets or other specifically negotiated exceptions to the senior-first waterfall.
B. Cross-Border Intercreditor Mechanics
In cross-border deals, intercreditor agreements must contemplate both US UCC liens and Mexican pledges. The agreement should specify that subordination applies to each jurisdiction's perfection mechanisms. A subordination that covers US UCC liens but not Mexican pledges leaves the seller with first priority in Mexico while subordinated in the US, creating asymmetry that complicates later enforcement.
Although Article 9 grants PMSIs special priority rules if statutory requirements are met, a secured party may contractually subordinate that priority in an intercreditor or subordination agreement. PMSI treatment differs between asset classes: (1) in equipment, a PMSI holder has a 20-day grace period from delivery to perfect and gains priority over earlier-perfected security interests; (2) in inventory, a PMSI holder must perfect upon receipt and must provide notice to all prior secured creditors, with priority limited to identifiable inventory financed. These distinctions are material in cross-border deals because the type of collateral determines whether super-priority is available.
V. Personal Guarantees and Entity Structures
A. Seller Note Guarantees
The promissory note is typically issued by the buyer entity (the acquiring corporation or LLC). If the buyer entity becomes insolvent or is dissolved, the note becomes an unsecured claim against a shell. Personal guarantees from the buyer's principals mitigate this risk.
A personal guarantee obligates the buyer's owner(s) to pay the note if the entity fails. The guarantee should be joint and several (each guarantor is liable for 100% of the obligation, not just their pro-rata share). Without joint and several liability, collection from one guarantor may not satisfy the full obligation.
B. Cross-Border Guarantee Complexity
A guarantee issued by a Mexican or U.S. guarantor should expressly state its governing law and forum. In cross-border practice, enforceability may still be affected by applicable conflict-of-laws principles, mandatory local law, and the forum in which enforcement is sought. If you have multiple guarantors in different countries, you may face multiple enforcement paths under different legal systems.
Mexican law permits personal guarantees but may impose statutory defenses (e.g., a guarantor's right to require the creditor to exhaust the principal debtor's assets before pursuing the guarantor). US law generally does not impose this requirement. This creates potential gaps where a Mexican guarantor has statutory defenses that a US guarantor does not. Mexican guaranty law affords guarantors statutory defenses, including excusión (the right to require the creditor to exhaust the principal debtor's assets before pursuing the guarantor) and orden (the right to require pursuit of co-guarantors in priority order). Waivers of these defenses are subject to strict enforceability requirements under Mexican law and may be limited in scope; Mexican courts have in some cases declined to enforce broad waiver language, particularly where the guarantor is not a sophisticated commercial party. Any waiver must be drafted with explicit language satisfying Mexican law requirements, must specifically identify each defense being waived, and may require review under Mexican law to assess enforceability in the relevant jurisdiction and under the parties' specific facts.
Governing law for guarantees is a critical negotiation point. Many sellers prefer governing law in the US state where the deal is managed, with enforcement in US courts, because US discovery and enforcement procedures are clearer for cross-border collection.
VI. Default Remedies: Acceleration, Foreclosure, and Cross-Border Recovery
A. US Remedies: UCC Article 9 Foreclosure
When the buyer defaults on a seller note secured by UCC-1 filing, the seller has the right to "repossess" the collateral and sell it to satisfy the debt. Repossession in UCC terms means taking control of the collateral without judicial process (provided this can be done without breach of the peace).
For equipment or inventory, the seller may hire a recovery agent to take possession. The collateral is then sold at public or private sale, with the proceeds applied first to the sale costs and then to the secured debt. Any surplus goes to junior lienholders or the debtor. Any deficiency remains owed by the debtor.
Foreclosure rights are subject to the requirement of "commercially reasonable" sale procedures. A sale conducted without required notice, to a related party at below-market price, or with inadequate marketing may be challenged as not commercially reasonable, which can expose the secured party to damages or defenses and may limit or bar its ability to recover a deficiency from the debtor.
B. Mexican Remedies: Judicial Foreclosure
Self-help repossession under Mexican law is far more limited than under U.S. law. Under Mexican law, enforcement of security interests typically requires judicial processes governed by the applicable commercial or civil procedure codes, unless the security instrument includes provisions for alternative enforcement mechanisms. The process typically involves commencing the applicable judicial enforcement proceeding, obtaining the necessary court orders, and carrying out seizure and sale through the court and its authorized enforcement officers, depending on the instrument and procedure.
Mexican enforcement is generally slower and more procedure-dependent than Article 9 self-help remedies in the U.S. The time to obtain seizure and sale varies significantly depending on the forum, collateral, procedure, service, debtor defenses, and appeals. This delay reduces the net recovery because the collateral may depreciate, and the buyer has time to strip value from the business.
C. Cross-Border Judgment Enforcement
If the buyer is insolvent and you cannot recover through security interest foreclosure, your alternative is a monetary judgment. A judgment in a US court for the seller note amount does not automatically execute in Mexico. Mexican courts do not enforce US judgments directly.
A U.S. judgment is not automatically enforceable in Mexico. The creditor generally must seek recognition and enforcement before the competent Mexican court under applicable procedural rules, and enforcement is subject to statutory requirements such as jurisdiction, service, finality, and public-policy review. Recognition and enforcement can add substantial time and cost, and the duration and expense vary significantly depending on the forum, service issues, debtor defenses, and whether the proceeding is contested.
In smaller disputes, the cost and delay of a recognition-and-enforcement proceeding in Mexico may consume a meaningful portion of the potential recovery, which is one reason upfront collateral and guaranty structure usually matter more than post-default litigation theory.
VII. The Cost of No Documentation: An Unsecured Claim
An unsecured creditor without collateral or a guarantee has a claim only against the debtor's general assets. In insolvency, recovery depends on claim priority, asset value, procedure, and jurisdiction-specific rules, and unsecured recovery may be materially impaired by delay, legal cost, and higher-priority claims. A secured note with properly documented collateral, perfection, guarantees, and priority arrangements usually provides materially better leverage and recovery prospects than an unsecured note, but outcome depends on the debtor's assets, competing liens, procedure, and jurisdiction.
VIII. Withholding Tax and Treaty Overlay
US-Mexico overlay. Article 11 of the U.S.-Mexico income tax treaty provides differentiated withholding outcomes for interest, including reduced rates or exemptions in certain cases, depending on the nature of the recipient and the payment; the applicable rate must be determined from the treaty and domestic law, not assumed to be a flat percentage. Interest paid by a U.S. obligor to a Mexican resident may be subject to U.S. withholding unless an applicable statutory exemption or treaty reduction applies and the required documentation is in place.
Interest accrued on a seller note is income to the seller and subject to taxation in the seller's country of residence. If withholding applies under the relevant domestic law and any applicable treaty, the payer must withhold the applicable amount at the time of payment, subject to available exemptions or reductions and the required documentation. The applicable withholding rate depends on the treaty, beneficial ownership, limitation-on-benefits, portfolio interest rules, and documentation (e.g., Form W-8BEN/W-8BEN-E).
The seller may be entitled to a foreign tax credit in their home country for withheld taxes, but the credit process is separate from the withholding itself. The seller's net cash flow from the note must account for treaty withholding.
Interest received on a seller note by a Mexican resident is ordinary income subject to Mexican income tax at ordinary rates under the LISR, in addition to any US withholding. Mexican residents may claim a foreign tax credit for US taxes withheld, subject to applicable limitations.
The treaty may reduce withholding rates on certain interest payments and, in some cases, may eliminate withholding entirely, depending on the category of interest, the status of the recipient, limitation-on-benefits and beneficial-ownership requirements, and proper documentation. Interest on loans between related parties, government entities, or specific structured instruments may qualify for reduced rates under the treaty (generally 4.9% to 10%-15% depending on the type of recipient). These reduced rates are narrow in application and require documentation. The parties generally should not assume that a reduced treaty rate applies without confirming the relevant treaty article, domestic-law exception, recipient status, and documentation requirements.
If the buyer is a Mexican entity paying interest to a US seller, Mexican withholding rules may also apply to those interest payments under the LISR.
Under IRC §1274 and §7872, if seller financing carries interest below the applicable federal rate (AFR), the IRS may impute interest at the AFR, recharacterizing a portion of the purchase price as interest income. For cross-border transactions, imputed interest may also affect withholding obligations under the US-Mexico Tax Treaty.
IX. Practical Documentation Checklist
A properly structured seller note requires:
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A promissory note specifying principal, interest rate, maturity, amortization schedule, and acceleration triggers.
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A security agreement granting the seller a security interest in described collateral (assets of the buyer or target company).
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A UCC-1 financing statement filed in the correct state for US assets (debtor's location governs).
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The appropriate Mexican security instrument for the relevant movable collateral (for example, a prenda sin transmisión de posesión or other applicable device), documented with the formalities required for that instrument and collateral, plus any required RUG registration; for Mexican real property, a hipoteca executed in the required form before a Mexican notary and registered in the applicable Registro Público de la Propiedad.
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A personal guarantee from the buyer's principal(s), specifying governing law and enforcement jurisdiction.
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An intercreditor agreement if the buyer is obtaining bank financing, subordinating the seller note to the bank lender and specifying recovery procedures.
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Representation and warranty insurance (if used) addresses specified breaches of representations and warranties under the acquisition agreement; it is not a substitute for credit support on the seller note, but may reduce overall deal risk.
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Documentation of the treaty withholding arrangement and tax reporting obligations for both parties.
This checklist is non-exhaustive. Cross-border deals introduce additional variables (currency fluctuations, regulatory changes, jurisdictional disputes) that require transaction-specific customization. But these eight elements form the foundation of a recoverable seller note.
X. Conclusion
Seller financing is a legitimate tool for closing cross-border M&A when the buyer cannot pay full consideration at closing. The difference between recovery and loss is structure. A seller note backed by perfected security interests in both the US and Mexico, guaranteed by the buyer's principals, and properly subordinated to institutional lenders, is a credible receivable.
A seller note issued without documentation is unsecured paper. Unsecured paper competes with trade creditors in bankruptcy. In the cross-border context, where enforcement is already costly and slow, unsecured paper may have materially reduced recovery value.
Transaction structures that account for default scenarios tend to produce stronger enforcement positions. Many sellers do not believe default will occur. Default risk is often underestimated.
This Insight is provided by HIRO LAW for general informational and educational purposes only. It does not constitute legal, tax, investment, or other professional advice and should not be relied upon as such. No attorney-client relationship is created by your receipt of or access to this material. The information contained herein may not reflect the most current legal developments and is not guaranteed to be complete, correct, or up to date. You should not act or refrain from acting based on any information in this Insight without first seeking qualified counsel licensed in the relevant jurisdiction(s). Each cross-border transaction, investment, and compliance matter involves unique facts and circumstances that require individualized analysis. Prior results do not guarantee a similar outcome.