We agreed to carry a 15 percent seller note to close our transaction, but the buyer's senior commercial lender demands a subordination agreement with an indefinite payment standstill. How do we negotiate these bank terms so our note does not get locked indefinitely?

Question

Tyler Smith · Accepted Answer

Senior commercial lenders routinely attempt to draft seller notes into deep subordination. They will ask for an indefinite standstill, which means if the buyer trips any senior loan covenant, the bank can freeze all principal and interest payments to you forever without triggering a default on your note.

Never sign an open-ended subordination agreement. You are acting as a mezzanine lender without receiving mezzanine returns, and you must negotiate specific bank concessions:
- Cap the payment standstill period at 90 to 180 days. Once the standstill expires, the buyer must resume payments to you unless the senior lender has actively accelerated their debt and foreclosed on the assets.
- Allow ongoing scheduled interest payments as long as the company maintains a defined fixed-charge coverage ratio, permitting blockages only for payment defaults on senior principal.
- Demand a borrower distribution freeze. If the senior bank halts payments on your seller note, the borrower must be legally prohibited from paying owner distributions, management fees, or executive bonuses.
- Require the bank to deliver concurrent default notices directly to you, giving your team visibility into operational distress before the business deteriorates.
- Negotiate catch-up provisions requiring immediate payment of accrued unpaid interest as soon as the senior default is cured or waived.

If a buyer cannot run their company with enough operational discipline to satisfy their debt service, your leadership team should treat that risk as an operational issue during IDS sessions rather than absorbing bad credit terms.