The buyer is funding part of the purchase price with an SBA or senior bank loan that requires a complete payment standstill on our seller note if the post-close business misses its debt service coverage ratio. How do we negotiate this intercreditor standstill agreement to ensure our seller note payments are not permanently frozen?

Question

Tyler Smith · Accepted Answer

Senior lenders routinely require seller notes to be subordinated to institutional credit, but an open-ended standstill agreement is toxic. If the post-close business trips a financial covenant under their bank facility, standard lender standstill language allows the bank to halt your monthly principal and interest payments indefinitely, effectively using your seller note as uncompensated equity.

Negotiate strict parameters around the intercreditor agreement before executing the definitive legal documents.

First, cap the duration of any payment blockage. Demand a maximum standstill period of ninety to one hundred and twenty days for non-payment covenant defaults. Include a restriction that the senior bank can only invoke one standstill period during any rolling twelve-month window. If the buyer remains out of compliance after the period expires, your cash payments must automatically resume.

Second, insist that during any cash standstill, your unpaid interest does not disappear. Require that it capitalizes into the note principal as payment-in-kind interest at a penalty rate that is two hundred to three hundred basis points higher than your baseline note rate.

Third, negotiate an operational spring-back provision. If the buyer defaults on senior debt and freezes your note for more than one hundred and eighty days, you must gain observation rights on their board or the contractual right to cure operational defaults before the senior lender can liquidate corporate assets. This prevents the buyer from mismanaging the company behind the shield of a permanent bank standstill.