Alternatives to rollover equity

searcher profile

February 17, 2023

by a searcher from Dartmouth College in Hanover, NH, USA

According to SBA loan terms, a seller may not roll over any equity during a SMB transaction. Earnouts are also not allowed. Any creative structures that present good alternatives? Very interested in hearing more about all your experiences, so please share!

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commentor profile
Reply by a lender
in United States
Seller earnouts are not eligible with the SBA. As ^redacted‌ indicated in the thread, a seller note or note(s) can help reduce the SBA loan exposure. A few loan structures I recommended to past borrower/buyer clients of mine ^redacted‌ , on the sizeable intangible asset deals were 5% cash injection from the buyer, 5% seller note #1 on full standby per SBA SOP as included in the initial overall 10% injection that SBA SOP requires. An additional 10% seller note #2 with immediate monthly P&I payments to the seller, subordinate to the senior SBA lender, same term as SBA loan, with an interest rate no higher than the SBA loan AND proof the subject business listing stand-alone historical debt service coverage meets the bank or nonbank threshold including the senior SBA loan, and the 2nd seller note monthly payment. This scenario provides a combined 20% equity injection as 5% buyer/borrower, 5% seller note #1 on full standby, and 10% seller note #2 with immediate P&I monthly payment to the seller.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I concur that your best option is to build it into a seller note. You can set the purchase price higher at closing and have the seller carry back the risk with a seller note. You just have to be cautious to be sure the debt service still works. You can then build a forgiveness into the seller note if certain reps and warranties or conditions are not met. I would be more than happy to jump on a call to discuss in more detail at any time. You can ping me here or directly at redacted
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