Deal StructureFinance
Subordination
Also known as: Debt subordination, subordination agreement, junior debt position
The priority ranking that puts seller notes behind the buyer's senior acquisition debt. The bank gets paid first from the company's cash flow — and can block principal payments to the founders entirely.
WHY IT MATTERS
Seller notes in PE deals are almost always subordinated to the buyer's senior lending facility. That means the acquisition lender gets paid before the founders — every quarter, in restructuring, and in liquidation. The subordination agreement typically restricts principal payments on seller notes whenever doing so would violate the senior lender's debt covenants. If the buyer's debt-to-EBITDA ratio drifts above threshold — which happens routinely when the buyer does bolt-on acquisitions — the bank can block all distributions to seller note holders. The founders' ability to collect depends on a lending agreement they're not party to, governed by a covenant they can't see, between a bank and a buyer they don't control.