The buyer is demanding we take back a seller note but wants to subordinate our debt to their senior bank lender, which means we might not get paid if things go south. How do we negotiate intercreditor agreements and subordination terms to protect our cash flow?

Question

Tyler Smith · Accepted Answer

Subordination is a standard requirement for senior lenders, but it does not mean you have to sign away all your rights and assume all the risk. When a buyer uses bank debt to fund the transaction, the senior lender will insist that your seller note is subordinated, meaning they get paid first.

To protect your position, you must negotiate the specific terms of the subordination agreement and the intercreditor agreement. Do not accept a blanket subordination. Instead, fight for a carve-out that allows you to receive regular interest and principal payments as long as the buyer is not in default on their senior debt.

Another critical point is the payment blockage period. If the buyer defaults on their bank loan, the senior lender will try to block payments to you indefinitely. You must limit this blockage period to a maximum of 150 to 180 days. If the senior lender has not accelerated their debt or resolved the default within that window, your payments must resume.

Additionally, insist on the right to accrue unpaid interest during any blockage period so you do not lose the value of your money.

Use your Accountability Chart to assign the responsibility of modeling these payment scenarios to your finance seat. Run structured Thinking Time to calculate the cash flow requirements of the combined business. If the post-close entity cannot comfortably cover both the senior debt and your seller note, the deal structure is fundamentally flawed.