The buyer is using senior bank leverage to acquire our company and requires us to carry a twenty percent seller note, but the bank demands a complete standstill agreement. How do we negotiate intercreditor terms to ensure our note actually gets paid?

Question

Tyler Smith · Accepted Answer

Senior lenders always require seller notes to be subordinated to senior debt. The danger lies in whether that subordination is merely lien subordination or payment subordination. In an aggressive intercreditor agreement, senior lenders often demand a complete payment standstill, meaning if the buyer trips any technical banking covenant, all principal and interest payments to you are blocked indefinitely.

You must draw a hard line between priority of liquidation and right to ongoing debt service. Insist that your seller note allows scheduled, quarterly payments of interest and principal so long as the company remains in compliance with its primary senior credit facility and no senior event of default has occurred.

Limit the duration of any payment blockage period. If the buyer defaults on their senior credit facility, the bank will want to freeze payments to you forever. Negotiate a blockage period capped at ninety to one hundred eighty days. Once that window expires, if the senior lender has not accelerated its debt or filed for judicial remedies, ordinary payments on your note must resume.

Additionally, require that blocked interest does not vanish: it must compound at an elevated default interest rate or capitalize into the note principal. Finally, retain clear remedies upon buyer default. If the buyer stops paying you outside of an active senior default window, you must maintain the contractual right to pursue collection or reinstate board observer seats. A seller note without payment protections is equity risk disguised as debt.