Alternatives to Rollover Equity after recent SBA SOP

April 28, 2025

by a searcher from Pomona College in Asheville, NC, USA

For those around LOI stage in SBA-funded deals who had initially offered 10-19% equity rollover to the seller, what are you thinking about replacing that with at this point in your offer structure, if anything? Top option appears to be a second seller note with EBITDA-based earnout hurdles. I've also considered a standby seller note, or adding performance-based equity grants (like public company PSUs) to the seller's consulting agreement. I'm not sure banks would allow the latter, however. I also don't think I would be allowed to, for instance, add the seller's child to the cap table as a minority equity investor, though I like the idea as a runaround. Curious what everybody here has come up with.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I am always happy to have a discussion about financing options, but there are a lot less available. One thing to keep in mind is if you structure a forgivable note it needs to be structured to be sure it does not impact cash flow up front and that it is structured with a maximum note amount and then forgiveness if metrics are not hit so it does not read like an earn-out. You can reach me here or directly at redacted if you want to discuss the limited options available.

Reply by a professional
from University of Michigan in Detroit, MI, USA

Your post hits the nail on the head. As a result of the SOP changes, we have less structuring tools at our disposal. If you're looking to bridge a valuation gap, your only real tool now is the seller note. If you were looking to secure the seller's longer term input into the business (more akin to a partner), you may still be able to pursue that route. But the seller is going to want a lot more control over the business for the first two years.

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