The buyer wants to use our own accounts receivable as collateral for their acquisition loan, which leaves our seller note completely unsecured. How do we structure a junior lien or intercreditor agreement to protect our interest?

Question

Tyler Smith · Accepted Answer

It is standard for a senior bank lender to demand a first priority lien on all business assets, including accounts receivable. This pushes your seller note into a risky, unsecured position. To protect your capital, you must negotiate a formal intercreditor agreement that outlines your rights as a junior secured creditor.

Do not settle for being completely unsecured. Demand a second-priority lien on all business assets, including intellectual property, equipment, and accounts receivable. While the senior lender gets paid first in a liquidation, your second lien ensures that if there is any remaining value, it goes to you before any equity holders or unsecured trade creditors receive a dime.

To make this work, the intercreditor agreement must define clear boundaries. Ensure the agreement includes:
- A default notice requirement, meaning the senior lender must notify you immediately if the buyer defaults on their bank loan.
- Standstill provisions that are limited in time, typically ninety to one hundred and eighty days, after which you have the right to take action to foreclose on your junior collateral.
- A clause allowing you to cure the buyer's default with the senior lender to prevent a firesale liquidation of the company you built.

This structured approach keeps you informed and gives you the legal standing to step in if the buyer mismanages the business.