Three employees buying out their founder discovered their loans were not equal

The situation

The first meeting happened over the phone, on a Thursday evening after the office had emptied out. Katalin called with Andrei on the line as well, both of them talking over each other slightly, trying to explain a deal that had three moving pieces and, it was becoming clear, three sets of interests that did not fully line up.

Katalin worked as a surveyor and Andrei as an office manager, both at a mid-sized company in Oshawa that a founder named Fatmir had built over roughly two decades and was now ready to retire from. Rather than sell to an outside buyer, Fatmir had offered the business to a group of longtime employees, Katalin and Andrei among them, at a price in the high six figures to low seven figures. The employee group did not have that kind of capital sitting available, so the deal was structured with two sources of money: a loan from the group's bank, and a vendor take-back loan from Fatmir himself, who agreed to be paid out over several years rather than all at once at closing.

This structure is common in employee buyouts, because it lets a founder exit without requiring buyers to raise the full purchase price up front, and it gives the founder an ongoing financial stake in the business succeeding. It also creates a question that does not always get asked early enough: if the business runs into trouble later and cannot pay everyone, who gets paid first, the bank or the founder?

Katalin and Andrei had assumed, without ever discussing it explicitly with Fatmir or with the bank, that both loans would simply be repaid on their own separate schedules, each according to its own terms. What they had not realized was that the bank's loan agreement, drafted before the vendor loan was finalized, already contained standard language requiring any other lender's claim against the business to rank behind the bank's in priority, and to stay silent, meaning collect nothing, for as long as the bank considered the business to be in any kind of trouble.

Where it went wrong

The problem surfaced when Fatmir's own advisor, reviewing the near-final documents before signing, flagged that the vendor take-back note had no protection at all if the bank ever declared the business in default. Under the bank's standard terms, the moment that happened, Fatmir would be blocked from receiving any further payments on his loan, potentially for an open-ended period, until the bank's own loan was fully satisfied or the bank agreed otherwise.

Fatmir was, understandably, unwilling to sign on those terms. He had built the company and was extending significant credit to help three of his own longtime employees buy it. Being told his repayment could simply stop indefinitely, with no defined limit, the moment the bank grew uneasy about the business, felt like being asked to accept all of the risk and none of the protection that a lender would normally expect.

Katalin and Andrei, for their part, had not intended to put Fatmir in that position. They had focused their attention on the purchase price and the operating plan for the business going forward, and had genuinely not understood that the standard subordination language in the bank's documents went as far as it did. When Fatmir raised the concern, their first instinct was that the bank would simply refuse to change anything, since subordinating other lenders behind a bank's own security is standard practice and banks are rarely eager to soften it.

This was the moment the three-party structure showed its strain. Katalin and Andrei wanted the deal to close on schedule and did not want to jeopardize their financing by pushing the bank too hard. Fatmir wanted enough protection that a temporary rough patch for the business would not permanently cut off his payments. Neither side was wrong to want what they wanted, but the interests only partly aligned, and nobody had built a document that reconciled them before the disagreement became personal between a founder and employees who had worked together for years.

What we did

1. Reviewed the bank's subordination language in full. We read the standard intercreditor terms the bank had proposed and confirmed that, as drafted, they gave the bank an unlimited right to block payments to Fatmir for as long as it considered the business to be in default, with no cap on duration and no defined path back to payments resuming.
2. Explained the concept to all three parties together. Rather than negotiating separately and creating more suspicion between Fatmir and the employee group, we held a joint call to walk through what subordination meant in plain terms, so everyone understood the actual mechanics rather than reacting to the fear of losing everything.
3. Proposed a defined standstill period instead of an open-ended block. We drafted alternative language limiting the bank's right to block Fatmir's payments to a fixed period, commonly used in these arrangements, after which Fatmir's loan payments could resume unless the bank took further defined enforcement steps of its own.
4. Negotiated directly with the bank's credit team. We presented the standstill proposal as a reasonable middle ground that still gave the bank meaningful protection during any real default, while preventing an indefinite freeze that could push Fatmir to refuse to close the deal at all, which would have left the bank without a deal to finance in the first place.
5. Added a cure mechanism. We built in a right for the employee group to bring the business back into good standing with the bank within the standstill window, after which Fatmir's payments would resume automatically without needing further negotiation or bank consent.
6. Clarified notice obligations. We required the bank to notify Fatmir directly if it considered the business in default, rather than leaving him to find out only once payments simply stopped arriving, giving him a real chance to understand what was happening to his own loan.
7. Finalized the intercreditor agreement. With the standstill period, cure right, and notice obligation in place, all three parties signed, and the purchase closed with Fatmir's vendor take-back loan still behind the bank in priority but no longer exposed to an indefinite freeze.

The outcome

The deal closed with Fatmir's loan remaining subordinate to the bank, which was not something the negotiation changed and realistically could not have changed, since banks do not typically agree to rank behind a vendor loan on a financed purchase like this one. What changed was the shape of that subordination: a defined standstill period rather than an open-ended one, a cure right giving the employee group a defined path back to normal payments, and a notice requirement so Fatmir would never again be blocked from payments without knowing why.

This was a partial outcome, and it is worth naming plainly. Fatmir gave up the possibility of negotiating his way to a fully equal footing with the bank, which some vendor lenders do manage to achieve in stronger bargaining positions. He accepted a defined period of risk in exchange for certainty about its limits, rather than the indefinite exposure the original draft would have left him with.

Katalin, Andrei, and the rest of the employee group closed on schedule with their bank financing intact, and the relationship with Fatmir, who remained available informally to answer questions during the transition, stayed workable rather than strained by a dispute that could have derailed the whole purchase in its final weeks. The business has continued operating without triggering the standstill provisions at all, which is the outcome all three parties were hoping the paperwork would never actually need to be tested against.

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