The buyer wants our seller note subordinated to their senior bank debt, but we are worried about getting completely shut off from payments if the company hits a minor cash flow bump. How do we structure subordination standstill periods and block-payment provisions to ensure we keep getting paid?

Question

Tyler Smith · Accepted Answer

When you accept a seller note, the buyer's senior lender will always require you to subordinate your debt. This means the bank gets paid first, and if the company defaults on its bank loan, the bank can block payments to you. However, you must negotiate the terms of this subordination to prevent a minor covenant breach from freezing your cash flow indefinitely.

First, limit the block-payment provision. The senior lender should only be allowed to block your payments in the event of an actual payment default on the senior debt, not for minor financial covenant defaults like a temporary leverage ratio spike. If they do trigger a block-payment notice for a non-payment default, insist on a strict limit, typically no more than one block-payment period of ninety to one hundred and eighty days in any three hundred and sixty-five day period. Once that standstill period expires, payments to you must resume unless the senior lender has accelerated their debt.

Second, use your EOS scorecard to monitor the situation. Ensure the subordination agreement allows you to receive financial reports from the buyer so you can see trouble coming before a default occurs. If the buyer is running a tight ship using EOS tools, their operational discipline should give the bank confidence. Do not let the buyer's attorney write a blank check that allows the senior bank to trap your cash forever over a technicality. Keep the standstill period short and the blockage triggers narrow.