We are agreeing to provide seller financing for twenty percent of the deal, but the buyer's senior bank lender is demanding a standstill agreement that blocks us from taking any collection action for a full year if the buyer defaults on our note. How do we negotiate the terms of this subordination to protect our recovery rights while still satisfying the bank?

Question

Tyler Smith · Accepted Answer

A senior lender demanding a standstill agreement is standard practice, but a twelve-month total freeze on your collection rights leaves you completely exposed. If the buyer defaults on your seller note, you cannot afford to sit on the sidelines for a year while the business deteriorates. You must negotiate a reasonable compromise that satisfies the bank's need for priority while preserving your safety.

First, negotiate to shorten the standstill period to ninety days. This gives the senior lender enough time to assess a default situation without permanently locking you out of your rights. During this ninety-day window, the buyer should be prohibited from paying out bonuses, making capital expenditures, or distributing profits to equity holders.

Second, insist on a subordinate but paid structure. This clause allows you to continue receiving your regularly scheduled principal and interest payments from the buyer's operational cash flow, provided the buyer remains in compliance with their senior bank covenants.

Third, secure the right to receive copies of all financial reporting and default notices sent between the buyer and the senior lender. You should not be kept in the dark. Use these reports to track the business's health against your historical V/TO® targets. If a covenant breach occurs, you will know immediately and can begin discussions with both parties before your standstill period is ever triggered. This balanced approach protects your financial interest while allowing the transaction to close.