If the buyer defaults on our subordinated seller note, what operational or governance control remedies can we write into the purchase agreement to seize back key assets or board seats without triggering a senior lender block?

Question

Tyler Smith · Accepted Answer

When you accept a seller note, you are almost always subordinated to a senior bank lender. This senior lender will require you to sign a subordination agreement that blocks you from accelerating the debt or foreclosing on assets if the buyer defaults. To protect yourself, you must negotiate remedies that bypass the senior lender's payment block.

Instead of focusing solely on monetary acceleration, structure operational and governance triggers directly into your purchase agreement and the company's operating agreement. One powerful lever is a board seat restoration clause. If the buyer misses two consecutive payments, you should automatically regain your seat on the board or even secure a majority voting control of the board until the default is cured. This does not violate the senior lender's priority on cash flow, but it gives you the operational authority to replace the executive team or redirect corporate strategy.

Additionally, you can secure the note with a pledge of the buyer's equity rather than the physical assets of the operating entity. If a default occurs, you can initiate a transfer of equity ownership back to yourself. Senior lenders are far more cooperative when you present this as an operational transition of leadership rather than a liquidation of assets. Ensure your Accountability Chart has a clear successor identified so that if you must step back in, the business does not stall. By focusing on governance control rather than cash seizure, you keep the senior lender aligned and protect your equity value.