The buyer is asking us to accept a seller note for a quarter of the purchase price but says their bank will not allow us to take a security interest in the company's accounts receivable or inventory. How do we secure our seller note without violating their senior lender's subordination requirements?

Question

Tyler Smith · Accepted Answer

Senior bank lenders will always demand first-lien security on all operating assets, including accounts receivable, inventory, and equipment, which forces your seller note into a subordinated position. To secure your position without killing the deal, you must look beyond the primary operating assets.

- First, negotiate a pledge of the buyer's equity in the acquiring entity. This means if the buyer defaults on your seller note, you can foreclose on their ownership shares and regain operational control of the business, bypassing the bank's asset liens.
- Second, secure personal guarantees from the buyer's principal sponsors or parent entity. This bypasses the senior bank's asset restrictions by holding the buyer's corporate parent or individual partners personally liable for the outstanding debt.
- Third, structure a junior lien that is explicitly subordinated to the senior lender but ahead of all other unsecured creditors and equity holders.

Combine this junior lien with an acceleration clause that triggers an immediate default on your note if the buyer defaults on their senior bank covenants. This ensures you are at the table during any restructuring discussions and prevents the buyer from continuing to pay themselves while ignoring your debt.