The buyer is demanding we carry a seller note for twenty percent of the purchase price, but they want us to subordinate to their senior bank lender. How do we structure the subordination agreement and default triggers so we do not get wiped out if the business struggles under new management?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand that your seller note is fully subordinated to their acquisition debt. This means if the business faces a cash crunch, the bank can block the buyer from making interest or principal payments to you. To avoid being completely wiped out, you must negotiate the terms of this subordination upfront, before signing the Letter of Intent. Start by negotiating a payment blockage block. This clause limits the bank's ability to freeze your payments to a specific timeframe, such as a maximum of one hundred and eighty days, and prevents them from blocking your payments more than once in any twelve-month period unless there is a payment default on the senior debt. This prevents the bank from permanently halting your cash flow over minor covenant infractions. Next, structure your default triggers to include operational performance metrics, not just financial ratios. Tie these triggers directly to your historical operating standards. For example, if the business falls below a specific customer retention threshold or if key members of the leadership team resign, this should trigger a technical default under your seller note. While you cannot foreclose ahead of the bank, a default should give you the right to increase your interest rate, demand additional collateral, or regain a seat on the board of directors. This structure gives you the necessary leverage to intervene and protect your remaining enterprise value before the senior lender decides to liquidate the business.