If the buyer defaults on our subordinated seller note post-closing, how do we structure our default remedies so we can seize operational control of the Board or step back in to run the business, rather than just getting stuck in a litigation loop with their senior lender?

Question

Tyler Smith · Accepted Answer

When you carry a subordinated seller note, you are at a structural disadvantage. The buyer's senior bank lender will force you to sign a subordination agreement that blocks you from taking legal action or seizing assets if the buyer defaults on your note.

To prevent being locked out of your remedies, you must negotiate specific corporate governance remedies that do not violate the senior lender's priority liens on the assets.

Instead of demanding cash or asset foreclosure as your primary remedy, structure your seller note to include board control transition rights. If the buyer misses two consecutive payments or breaches a core financial covenant, the equity voting rights of the company must automatically transfer to you. This allows you to reconstitute the Board of Directors and replace the executive team.

Once you have board control, you can step back in operationally, implement your EOS systems to stabilize the business, and run the company back to profitability. The senior bank will typically agree to this because they would rather have an experienced operator step in to fix the business than watch it fail under incompetent ownership. This protects your financial investment without triggering a costly legal battle with the bank.