The senior lender is requiring me to sign a subordination agreement that blocks my seller note payments if the company breaches any financial covenants post-closing. How do we structure carve-outs so I still get paid if the business remains fundamentally healthy?

Question

Tyler Smith · Accepted Answer

Senior lenders will almost always demand that your seller note be subordinated to their debt, meaning your payments could be blocked if the business misses its bank covenants post-closing. This is a massive risk that can cost you millions if the buyer mismanages the company. To protect your cash flow, you must negotiate specific carve-outs in the subordination agreement before signing the definitive deals. First, demand a block-payment limit, which restricts the senior lender's ability to halt your payments to a maximum of ninety or one hundred and twenty days, after which payments to you must resume unless the company is in actual bankruptcy. Second, insist that minor technical covenant defaults: like a delayed financial reporting filing: cannot trigger a payment blockage on your seller note. Only a major payment default on the senior debt should stop your cash. Third, ensure that any blocked payments accumulate as unpaid, compounding interest rather than being forgiven. Show the buyer and the senior lender that your seller note is backed by a highly disciplined management team running on EOS, which significantly reduces the risk of operational default. By keeping the business focused on its weekly Level 10 Meetings and quarterly Rocks, you maintain the operational health needed to clear these senior debt hurdles and secure your payments.