We are being asked to provide seller financing representing thirty percent of the purchase price, but we want to ensure we do not lose control over our operational IP if the buyer defaults. How do we structure the default remedies and security interests in the promissory note without getting blocked by their senior bank?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a junior lender, and the buyer's senior bank will demand absolute subordination. If the buyer defaults on your payments, the senior bank's standstill agreement will typically block you from taking legal action or seizing assets for six months or more. To protect your position, you must negotiate carve-outs in the subordination agreement.

Establish a specific default remedy that allows you to reclaim your proprietary intellectual property or operational systems if payment is missed. This requires a separate security agreement and an intellectual property pledge. While the senior lender will claim first priority on tangible assets, they may allow you to hold a first-lien position specifically on your proprietary code or systems, provided it does not impair their ability to run the business in a liquidation scenario.

You can also structure the note so that default triggers an automatic step-up in interest rates or causes governance rights to revert back to you, such as reclaiming a seat on the board. Work with an experienced M&A attorney to build these triggers directly into the loan documents before signing. Running on EOS® means you have clear visibility into your processes, and you can structure these agreements to ensure that if the buyer cannot manage the business, you have a clear path to step back in and secure your equity.