If the buyer defaults on our seller note, the senior bank's subordination agreement prevents us from seizing company assets. How do we negotiate a debt-to-equity conversion right in our seller note to regain operational control if they miss payments?

Question

Tyler Smith · Accepted Answer

When you accept a seller note, the senior bank will almost always force you to sign a subordination agreement that blocks you from taking cash or seizing physical assets if the company defaults. This can leave you completely helpless while a bad buyer runs your legacy business into the ground. To bypass this asset-lockout, you must negotiate a debt-to-equity conversion right directly into your seller note. This clause states that upon an uncured payment default, you have the unilateral right to convert the remaining balance of your note into voting common equity of the operating company at a pre-determined, highly unfavorable valuation for the buyer. This conversion must be paired with an automatic board restructuring agreement, giving you the immediate right to replace the board of directors and take back operational control of the company. Because this is an equity transaction at the parent level, it does not violate the senior lender's physical asset covenants, which means the bank cannot block it. In fact, banks often prefer this because it replaces an incompetent management team with the seasoned operator who built the business in the first place. This structural trigger ensures that if the buyer fails to execute their V/TO® and misses their debt service, you can step back in, run your EOS processes, and protect your equity value before it is too late.