The buyer wants us to take a substantial seller note but is insisting that it be fully subordinated to their senior bank debt, meaning we get blocked from receiving payments if they breach their bank covenants. How do we structure the subordination terms or use our EOS metrics to protect our monthly cash distributions?

Question

Tyler Smith · Accepted Answer

Accepting a subordinated seller note is a common way to close a valuation gap, but you must prevent the buyer from using their own operational failures to halt your payments. When senior lenders demand subordination, they typically insert a payment blockage clause. This clause allows them to freeze your seller note payments if the buyer defaults on senior debt covenants.

To protect your cash flow, you must negotiate a strict limit on these payment blockages. Insist on a standstill agreement that caps any payment blockages at a maximum of one hundred and eighty days in any twelve month period. Additionally, require that any blocked payments accumulate with default interest and must be caught up immediately once the blockage period expires or the default is cured.

You should also tie your protection to operational governance. Use your EOS Accountability Chart and weekly Scorecard to maintain visibility if you are retaining a minority stake or operating role. Negotiate for financial covenants in your seller note that mirror the senior bank covenants but have slightly wider margins. This gives you an early warning system.

If the buyer's weekly Scorecard metrics show a downward trend, you can initiate a formal dispute or consultation process before a bank default occurs. Finally, ensure the purchase agreement states that a default on the seller note triggers a penalty, such as the right to regain a seat on the board or access to specific company assets.