The buyer is asking us to accept a seller note with a balloon payment in year five, but we want to secure our note with a junior lien on their accounts receivable. How do we structure this intercreditor agreement with their senior lender so we are not left completely empty-handed if the business struggles?

Question

Tyler Smith · Accepted Answer

Accepting a seller note with a year-five balloon payment means you are acting as a junior lender, but without the typical protections of a commercial bank. The buyer's senior lender will require you to sign an intercreditor agreement that severely restricts your rights. To avoid being left empty-handed if the business struggles, you must negotiate critical carve-outs in that agreement. First, fight for a junior lien on the company's accounts receivable and intellectual property. While the senior lender will have first priority, having a secondary lien prevents the buyer from pledging these core assets to other creditors. Second, negotiate a payment blockage limit. Senior lenders will try to block payments on your seller note if any default occurs on the senior debt. You must limit this blockage period to a maximum of ninety days, after which payments to you must resume unless the senior lender has initiated formal foreclosure proceedings. Third, define what constitutes a permitted payment. The intercreditor agreement must explicitly allow you to receive regular interest and principal payments as long as the buyer is in compliance with their senior debt covenants. Finally, include a cure right. This allows you to personally step in and pay any missed senior debt payments, preventing a foreclosure that would wipe out your junior position. This preserves your ability to protect your seller note without being completely at the mercy of the senior bank.