The buyer wants us to hold a junior seller note for 15 percent of the deal, but their senior lender is demanding a complete standstill agreement. How do we structure this seller financing so we are not left holding an empty bag if things go sideways?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand that your seller note be subordinated to their debt, but a complete standstill agreement is unacceptable. A standstill prevents you from taking any action to collect interest or principal, even if the buyer is defaulting on your note, until the senior debt is fully paid off.

To protect your position, you must negotiate a customized subordination agreement with the senior lender.

- Insist on a permitted payments clause that allows you to receive regularly scheduled principal and interest payments as long as the buyer is not in active default under the senior loan.

- Negotiate a block period, which limits the senior lender's ability to stop your payments to a specific timeframe, typically no more than ninety or one hundred and eighty days, after which payments to you must resume.

- Secure a junior lien on the assets of the business and require a personal guarantee from the buyer's principal sponsor.

By using your EOS V/TO and financial metrics to demonstrate consistent cash flow, you can prove to the senior lender that the business has more than enough capacity to service both debts. This operational transparency is your best tool to negotiate reasonable subordination terms.