The buyer wants us to carry a seller note, but their senior bank is demanding a strict subordination agreement that could block our interest payments if the buyer breaches a bank covenant. How do we structure our seller financing terms to protect our payment stream without scaring off the senior lender?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are effectively acting as a junior lender, and the buyer's bank will always insist on being paid first. To prevent the senior lender from completely freezing your payments over a minor technical covenant breach, you must negotiate specific carve-outs in the subordination and intercreditor agreements before you sign.

First, negotiate a clear definition of what constitutes a payment blockage event. A block should only occur if there is a payment default on the senior debt, not for minor financial or reporting covenant breaches.

Second, demand a reasonable standstill period, typically limited to ninety or one hundred and twenty days. This ensures that even if a blockage event is triggered, the senior lender cannot suspend your payments indefinitely without taking active foreclosure steps against the buyer.

Third, align these financial terms with your business operating system. Require the buyer to provide you with their monthly financial statements and the weekly Scorecard metrics of the operating business. This transparency allows you to monitor the health of the company in real time.

If you see key metrics slipping on the Scorecard, you can proactively engage with the buyer's leadership team before a bank covenant is actually breached. This operational foresight is your best defense against a sudden payment freeze, ensuring your seller note remains a secure, cash-generating asset.