A private equity buyer is insisting on a seller note to fill a gap in their capital stack, but their senior lender is demanding a strict subordination agreement that blocks us from declaring a default even if the buyer misses our payments. How do we negotiate a standstill period and cure rights in the intercreditor agreement to protect our position?

Question

Tyler Smith · Accepted Answer

A seller note is often the final piece needed to close a valuation gap, but senior bank lenders will always demand that your debt be subordinated to theirs. The key is in the intercreditor agreement. If the buyer defaults on their bank covenants, the senior lender will try to block all payments to you indefinitely. You cannot accept a permanent block. Negotiate a limited standstill period, typically one hundred twenty to one hundred eighty days. This means that if the buyer defaults and the senior lender blocks your payments, you only have to wait out the standstill period. Once that time expires, you must have the right to resume receiving payments or pursue remedies against the buyer, provided the senior lender has not accelerated their own debt. Additionally, negotiate a basket for permitted payments. This allows the buyer to pay you regular interest and principal payments as long as they are in compliance with their financial covenants at the time of the payment. Make sure your Integrator and leadership team review these terms against your historical cash flows. Use your EOS Accountability Chart to ensure your CFO has the authority to audit the buyer's post-closing compliance certificates quarterly. You must remain vigilant to protect your position in the capital stack.