The buyer is asking us to carry a twenty percent seller note to plug the gap in their senior bank financing, but the senior lender is demanding we sign a highly restrictive subordination agreement. How do we structure our seller financing to protect our right to receive monthly interest payments and prevent the bank from unilaterally blocking our cash flow?

Question

Tyler Smith · Accepted Answer

When carrying a seller note to bridge a deal, the buyer's senior bank lender will always demand that you sign a subordination agreement. Senior lenders want to ensure they are paid first, and they will try to block any cash from leaving the business to pay you if they detect even a minor covenant breach.

To protect your cash flow, you must negotiate the terms of this subordination upfront before signing the Letter of Intent. Do not accept a blanket standstill provision that allows the bank to block your payments indefinitely.

First, insist on a payment blockage limit. The bank should only be allowed to halt your junior payments if there is a monetary default on the senior loan, and this block should be capped at ninety or one hundred twenty days. If the senior lender does not accelerate their debt or file for bankruptcy within that window, your payments must resume.

Second, negotiate for the right to receive regular interest payments even if principal payments are deferred. You should also demand a default interest rate that triggers if your payments are blocked, compensating you for the added risk.

Finally, ensure your note is secured by a junior lien on the assets of the company. While the bank has primary rights, having a junior lien gives you a seat at the table in a restructuring, preventing the buyer and senior lender from wiping out your position without your input.