The buyer is asking for a five-year seller note to fund fifteen percent of the transaction, but their senior credit agreement mandates that excess cash flow sweeps take priority over our principal amortization. How do we structure seller note repayment terms so our liquidity is not permanently blocked?

Question

Tyler Smith · Accepted Answer

Senior lenders always demand primacy, but accepting an open-ended cash flow sweep turns your seller note into equity-level risk without equity-level upside. You must establish strict boundaries in the subordination agreement before signing.

First, require mandatory quarterly cash interest payments that are exempt from the senior debt sweep, provided no senior payment default exists. If the senior lender insists on blocking principal payments during cash sweep periods, negotiate a payment-in-kind (PIK) interest toggle. Under a PIK structure, any unpaid interest capitalizes into the principal balance at an increased interest rate, such as adding three hundred to four hundred basis points to the coupon.

Second, limit senior lender payment blockage periods. A standard market blockage provision should last no longer than 150 to 180 days, with a limit of one blockage per 360-day period. If the senior lender fails to accelerate its own debt during that window, cash payments to your note must automatically resume.

Third, demand a fixed final maturity date that cannot be extended by senior loan amendments. If the buyer cannot pay the balloon payment at year five, require a mandatory refinancing covenant or an equity cure contribution from the buyer sponsor.

Track this risk using the Step by Step Exit framework during your quarterly planning. If the leadership team running on EOS cannot produce predictable cash flow to service senior debt plus your note, you should not carry the paper. Keep the note amortizing straight-line or require a personal guarantee or rollover equity instead.