The buyer wants us to accept twenty percent of our transaction value in a junior subordinated seller note, but their institutional lender is demanding we agree to unlimited payment blockage. How do we protect our monthly cash flow?

Question

Tyler Smith · Accepted Answer

Accepting a subordinated seller note requires building a high level of trust with the buyer while establishing strict, enforceable legal boundaries. You must not agree to an unlimited payment blockage. Instead, negotiate a capped blockage period, typically no more than ninety to one hundred and eighty days, and limit the bank to triggering this blockage only once in any twelve-month period. Additionally, structure the agreement so that interest continues to accrue and compound during any blockage period, rather than being forfeited. Frame this negotiation around the shared goal of post-close stability. Use the Trust Creation Process by engaging directly with the buyer to explain that your willingness to finance their acquisition depends on a fair allocation of risk. If their senior bank triggers a default, you should have the right to receive detailed financial reports so you can monitor the situation. By establishing these guardrails, you protect your cash flow from being indefinitely frozen due to minor covenant breaches by the buyer, while still giving the senior lender the priority they require.