The buyer wants us to subordinate our seller financing note to their commercial bank lender with a full standstill agreement. How do we negotiate the intercreditor terms so our note is not rendered worthless if their senior debt covenants trip?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand subordination on a seller note, but agreeing to an open-ended standstill agreement is financial suicide. If the buyer defaults on their bank loan or breaches a financial covenant post-close, an uncapped standstill prevents you from demanding payment, foreclosing on collateral, or accelerating your note indefinitely.

To protect yourself, negotiate three strict parameters inside the intercreditor agreement before you sign the definitive purchase agreement. First, place a firm cap on the payment blockage period. Standard commercial terms allow the senior lender to freeze your seller note payments for no more than 90 to 180 days, and they should only be permitted to invoke this block once in any rolling 365-day period. Second, stipulate that while cash interest payments may be temporarily suspended during a block, interest continues to accrue at a penalty rate and capitalizes into the principal balance rather than being forgiven.

Third, demand clear cure rights. If the buyer misses senior debt obligations, you must have the legal right to cure the senior default on their behalf or trigger a forced sale process if the senior lender does not initiate foreclosure within a specified window. In your EOS leadership meetings, use the IDS process to evaluate the buyer's post-close debt service coverage ratio under stressed conditions. If the cash flows leave less than a twenty percent cushion above combined senior and junior debt obligations, reject the structure. You are a departing owner cashing out equity, not an uncompensated mezzanine lender.