The buyer is demanding we carry a seller note for twenty-five percent of the transaction, but their senior lender is forcing us into a deep subordination agreement that halts our payments if the buyer breaches a financial covenant. How do we negotiate a payment blockage cap to protect our cash flow?

Question

Tyler Smith · Accepted Answer

A deep subordination agreement is a common trap when carrying a seller note. Senior lenders will always try to restrict your cash flow by inserting broad payment blockage events, which allow them to freeze your payments if the buyer commits a technical, non-monetary default under the senior loan.

To protect your cash flow, you must negotiate a strict blockage cap. A standard cap should limit the senior lender to a single blockage period of no more than one hundred and eighty days in any three hundred and sixty-five day period. Once that blockage window expires, the senior lender must either foreclose on the business or permit the buyer to resume payments to you, regardless of whether the default is cured.

Furthermore, restrict the types of defaults that can trigger a blockage. Do not allow minor technical infractions, such as a late reporting delivery, to stop your cash flow. Only material financial covenant defaults, like violating the leverage ratio or missing a senior interest payment, should trigger a block.

You must also negotiate the right to receive catch-up payments for all missed principal and interest once the blockage period ends or the default is cured.

To maintain leverage, ensure your subordination agreement states that interest continues to accrue at a higher default rate during any blockage period.

By setting these clear boundaries, you prevent the senior lender from using your seller note as a cheap insurance policy for their own bad underwriting.