How do we coordinate our seller note with the buyer's primary bank subordination agreement to ensure we do not get completely locked out of payments if the business misses its debt service coverage ratios?

Question

Tyler Smith · Accepted Answer

When carrying a seller note, the buyer's senior lender will demand that you sign a subordination agreement. This agreement can turn your note into a defenseless piece of paper if you are not careful. Senior banks typically try to block all payments to you if the buyer experiences any technical covenant default, even if the business is still cash flow positive. You must negotiate a standstill provision that is strictly capped. Do not agree to an indefinite block on your payments. Insist on a payment blockage period of no more than 90 to 120 days, and limit the bank to imposing this block only once in any 360-day period. If the buyer is still in default after the blockage period ends, your payments must resume unless the senior lender has accelerated their own debt. Additionally, define what constitutes a default under your note. Make sure that any payment blockage by the senior lender still allows interest to accrue on your note at a default rate, compounding monthly. In your EOS Level 10 Meetings, track the buyer's financial metrics if you have access, or require quarterly financial reporting as a covenant in your note. Use the IDS® process to address early warning signs of operational decline. If the business starts missing its targets, you want to know long before the senior bank triggers a default block, allowing you to work with the buyer to correct course or prepare your legal remedies.