The buyer is demanding that we carry a twenty-five percent seller note subordinated to their senior bank lender. How do we structure this seller financing so we have operational oversight without violating the bank's subordination agreement?

Question

Tyler Smith · Accepted Answer

Carrying a subordinated seller note is a common way to close a valuation gap, but senior bank lenders will demand that you stand last in line for payment. They will restrict your ability to collect payments if the business breaches bank covenants. To de-risk this, you must negotiate specific carve-outs in both the subordination agreement and the promissory note.

- Ensure the subordination agreement allows you to receive regular interest and principal payments as long as the buyer is not in active default with their senior lender. Do not agree to a complete block on all payments from day one.

- Next, negotiate information rights. You must have the right to receive quarterly financial packages, including the same reporting the buyer provides to their bank. Track these metrics closely.

- Include a covenant that prevents the buyer from changing key leadership roles or abandoning the EOS framework without your written consent. If they stop running the Level 10 Meeting process or ignore the Accountability Chart, the risk of operational drift rises. If they violate these covenants, it should trigger an acceleration of the note or a penalty interest rate.

- Finally, negotiate a right of first refusal to buy back the business at a discounted rate if they fail to meet their obligations. This keeps you in control of your financial destiny even while holding paper.