How do we negotiate subordination terms on our seller note with the buyer's senior bank lender to prevent them from blocking our interest payments during minor technical defaults?

Question

Tyler Smith · Accepted Answer

When offering seller financing, the buyer's senior bank lender will always demand that your seller note be subordinated to their senior acquisition debt. If you accept a standard, one-sided subordination agreement, the senior lender can block your interest and principal payments under a wide variety of minor, technical defaults on their bank loan.

To protect your cash flow, you must negotiate a clear stand-still period and tight payment blockage limits within the intercreditor agreement. First, limit the senior lender's right to block your payments to major covenant defaults, such as missed payments on the senior loan. Do not allow them to block your payments for administrative or reporting defaults.

Second, restrict the payment blockage period to a maximum of ninety days in any twelve-month period. If the senior lender does not accelerate their debt or file for foreclosure within that ninety-day window, your payments must automatically resume.

Third, ensure that any blocked interest payments continue to accrue and compound, rather than being forfeited.

Finally, maintain visibility. Demand that the buyer provide you with the same monthly financial reports they send to their senior lender. By enforcing this level of transparency, you can use your thinking time to spot operational red flags before a payment block is ever triggered.