We are accepting a seller note for 30 percent of the purchase price and want to secure it with a stock pledge agreement that allows us to immediately seize voting control of the board if they miss a single quarterly payment. How do we negotiate these default remedies without triggering a veto from their senior lender?

Question

Tyler Smith · Accepted Answer

When you accept a substantial seller note, you are effectively acting as a bank, but without a bank's regulatory protection. To secure your position, you must negotiate a stock pledge agreement that allows you to reclaim ownership or voting control of the business if the buyer defaults. Senior lenders will always require you to subordinate your note, but you can still secure meaningful default remedies that do not interfere with their senior lien.

- First, structure the stock pledge so that a default on your note immediately triggers a transfer of voting rights, allowing you to replace the board of directors, rather than forcing an immediate cash liquidation that the senior lender would block.

- Second, negotiate a cure period of no more than fifteen days for missed payments, ensuring you can act swiftly before the business degrades further.

- Third, obtain a covenant in the subordination agreement that permits you to receive interest payments as long as the buyer is in compliance with their senior debt ratios.

This operational default trigger allows you to step back into the driver's seat and protect the company's assets before a bad manager runs your legacy into the ground, preserving your options without triggering a senior lender veto.