The buyer is funding fifty percent of the acquisition with bank senior debt and asking for a twenty percent seller note with a five-year balloon, but the bank draft subordination agreement blocks our balloon payment unless the senior debt is fully extinguished. How do we negotiate debt recapitalization and balloon liquidity carve-outs in the intercreditor agreement?

Question

Tyler Smith · Accepted Answer

Senior commercial lenders will always attempt to lock junior seller paper into complete subordination, freezing your principal until their senior facility is paid to zero. A five-year balloon note that cannot be repaid due to bank blockage turns your seller financing into a permanent, involuntary capital contribution.

To solve this, negotiate the intercreditor terms concurrently with the letter of intent, not the night before closing. Demand specific permitted refinancing carve-outs. Under this clause, if the buyer refinances, recaps, or expands their senior debt facility during the five-year term, they must use a designated percentage of new loan proceeds to retire your seller note balloon.

Second, insist on an equity recapitalization liquidity trigger. If the buyer brings in outside equity or sells minority units, a mandatory cash sweep must pay down your principal balance ahead of any distributions to equity holders.

Third, build in a structural interest penalty if the balloon is blocked at maturity. If the senior debt covenants legally prevent the buyer from refinancing or paying the principal balloon at year five, your note should not simply freeze. Require an immediate coupon increase of three hundred to five hundred basis points, structured as mandatory monthly cash interest or cumulative payment-in-kind interest. This creates a severe financial incentive for the buyer to clear your junior paper rather than hiding behind their senior lender subordination agreement.