We have a two million dollar valuation gap with a buyer who has hit their senior debt capacity limit. How do we structure a combination of a subordinated seller note and equity warrants to bridge this gap while keeping the senior lender happy?

Question

Tyler Smith · Accepted Answer

When a buyer wants to acquire your business but is capped by their senior lender's leverage limits, you face a common deal-making obstacle. You can bridge a two million dollar valuation gap by structuring a combination of a subordinated seller note and equity warrants, allowing the transaction to close without violating senior bank covenants. To make this structure work, the seller note must be subordinated to the senior debt. This means you agree to pause principal payments if the buyer defaults on their bank covenants, which satisfies the senior lender's risk requirements. To compensate for this subordination risk, negotiate a higher interest rate and a payment-in-kind toggle that allows unpaid interest to accrue and compound. To capture the upside of the business you helped build, pair the seller note with equity warrants. Warrants give you the right to purchase a specific percentage of the company's equity at a nominal price upon a future liquidity event. This creative structure bridges the valuation gap today while positioning you for a significant payout tomorrow. It aligns your interests with the buyer's success and gives the senior lender the comfort they need to fund the primary acquisition debt.