The buyer wants us to take a subordinate position behind their senior bank lender for our seller note, but we want senior rights if they breach covenants. How do we structure an intercreditor agreement to protect our seller financing without blowing up their acquisition debt?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand subordination, meaning they get paid first. However, you do not have to accept a complete block on your rights. You must negotiate a balanced intercreditor agreement that protects your seller note while keeping the bank comfortable. First, negotiate a standstill period. If the buyer defaults on your seller note, the bank will prevent you from immediately foreclosing. Limit this standstill to a maximum of ninety to one hundred and twenty days. Once this period expires, you must have the right to take legal action or seize junior collateral if the bank has not already done so. Second, define permitted payments clearly. The intercreditor agreement must allow the buyer to pay you regular interest and principal payments under the seller note as long as they are not in default on their senior debt. If a senior default occurs, the block on your payments must be temporary, usually capped at one hundred and eighty days, rather than indefinite. Third, use operational metrics to monitor risk. Include covenants in your promissory note tied to your weekly Scorecard metrics. If the company debt-to-EBITDA ratio rises or working capital drops below your historic benchmarks, it should trigger an automatic consultation period. This allows you to work with the leadership team to address issues before a bank default occurs, preserving your investment.