The buyer wants us to finance twenty-five percent of the purchase price with a seller note, but their senior bank is forcing us into a subrogated position with zero rights to declare default. How do we structure covenants in that note to protect our position?

Question

Tyler Smith · Accepted Answer

When carrying a seller note, senior lenders will almost always demand that you sign a subordination agreement. However, signing a standard bank-drafted standstill agreement is a mistake that can leave you holding an empty bag. You must negotiate terms that protect your position while satisfying the senior lender's basic requirements. First, refuse an indefinite standstill. Negotiate a payment standstill that is strictly limited in time, typically ninety to one hundred and twenty days. If the buyer defaults on your seller note, you should only have to wait out this short block period before you can take legal action to collect. Second, ensure that you are permitted to receive regular payments of principal and interest as long as the senior debt is not in active default. The agreement should clearly state that payments on your note only block if the buyer is in default on their senior loan. Third, include non-monetary default provisions in your seller note. If the buyer fails to maintain key operational standards, dismantles your EOS leadership team, or deviates from the agreed-upon business plan, you must have the right to declare a default. This allows you to accelerate the debt or force a restructuring before the business completely loses its ability to pay.