The buyer is asking us to carry a twenty percent seller note to close the valuation gap, but their senior bank lender demands that our note be fully subordinated and blocks any payments if there is a technical covenant default. How do we structure this seller note to protect our cash flow?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand complete subordination of your seller note, meaning they want the power to block your monthly payments if the buyer violates any covenant in the senior loan agreement. Accepting these terms blindly puts your cash flow at extreme risk. You must negotiate specific carve-outs to protect your position.

- First, negotiate a payment blockage cap. Agree that the senior lender can only block your payments for a limited period, typically no more than ninety to one hundred and eighty days, and only if there is a payment default on the senior debt, not just a minor technical covenant default. Once the blockage period expires, your payments must resume, and any missed payments must be caught up immediately.

- Second, structure the note to accrue interest-in-kind if cash payments are blocked. If the buyer cannot pay you in cash due to senior lender restrictions, the unpaid interest should capitalize into the principal balance and compound, rather than simply being forgiven or delayed without penalty.

- Third, require a stock pledge of the operating entity that is secondary only to the senior lender. While you cannot hold a primary lien on the company's physical assets, holding a junior pledge on the equity gives you the right to step in and take operational control if the buyer defaults. Use your EOS® leadership team structure as your ultimate insurance policy. If the buyer fails, your team is fully capable of running the business again to protect your equity.