The buyer is asking us to accept a seller note for 25 percent of the purchase price, but they want us to accept a junior position behind their secondary mezzanine lender. How do we structure our default remedies so we do not lose our company and get nothing?

Question

Tyler Smith · Accepted Answer

Agreeing to sit behind both a senior bank lender and a mezzanine lender puts your seller note at extreme risk. Mezzanine lenders are notoriously aggressive and will demand tight subordination agreements that can block your payments at the first sign of a covenant default. To protect your position, you must negotiate specific carved-out rights and default remedies in your subordination agreement.

First, fight for a block-payment limit. This means the senior or mezzanine lender can only freeze your seller note payments for a maximum of ninety or one hundred twenty days in any twelve-month period. If the buyer remains in default after that period, your payments must resume.

- Require a secondary lien on specific, unencumbered operating assets, such as your proprietary software or automated workflows.

- Secure an equity pledge agreement that allows you to reclaim a percentage of the company's equity if they default on your note.

- Ensure you have the right to receive monthly financial packages, including their bank compliance certificates, so you can see trouble coming.

If the buyer defaults and fails to cure, your ultimate remedy should be the right to regain a seat on their governing board or step back into an advisory role with operational veto power. This allows you to protect your investment before the business is completely run into the ground.