The buyer is demanding that our seller note include a complete payment standstill if they breach any of their senior bank debt covenants. How do we negotiate carve-outs for scheduled interest payments to ensure we still receive cash flow while protecting their lender?

Question

Tyler Smith · Accepted Answer

A senior lender will always demand subordination, but accepting a blanket standstill agreement on your seller note is a recipe for getting starved of cash. If the buyer misses a financial covenant with their bank, a complete standstill stops all payments to you, even if the business is still generating sufficient operating cash flow.

You must negotiate carve-outs that limit the senior lender's ability to block your payments. First, agree that payments on your seller note can only be suspended if there is an actual payment default on the senior debt, not just a technical covenant default like failing to submit a quarterly report on time.

Second, place a strict time limit on any block or standstill period. Limit the suspension of your interest payments to a maximum of 120 or 180 days in any 12-month period. Once that block period expires, the senior lender must either foreclose on the business or allow payments to you to resume.

Third, negotiate for unpaid interest to accrue and compound at a higher default rate during any standstill period. This incentivizes the buyer and their lender to resolve the default quickly.

Finally, run this negotiation through your IDS® process. Identify the exact risk thresholds, discuss the impact on your post-close cash flow, and solve it by demanding equity conversion rights. If the buyer defaults on their bank debt and blocks your note payments for more than six months, you should have the right to convert your unpaid debt into equity, giving you control to step in and fix the operations.