Anyone have experience with using forgivable Seller Notes and an SBA loan?

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August 17, 2023

by a searcher from Brigham Young University - Marriott School of Management in Grapevine, TX, USA

I'm currently working on a deal where the company has seen significant growth in earnings during the year. They are using their recent growth to try and justify a higher price on the business. I offered an LOI at a lower purchase price based on historical cash flows but it was too low for them to accept. I like the business overall, and the sellers seem to like me so we're trying to come to terms that we can both agree with. I'm exploring using a forgivable Seller Note to try and give them a higher price while mitigating my risk if the company can't maintain the same trajectory they are on this year. The seller note would be partially forgivable based on future earnings being in line with 2023 earnings.

I spoke with one lender who mentioned they have not had much success getting a deal with a forgivable seller note approved. Anyone have any experience/success with this? Would love to hear how you structured the deal to make it possible and SBA approvable.

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commentor profile
Reply by a professional
from American University in Irvine, CA, USA
It is very important to bring the Buyer's CPA into the mix when you are structuring these notes, as what is often colloquially referred to as Seller forgiveness is really a form of purchase price reduction based upon one or more performance factors, yet if it is characterized as a true forgiveness of indebtedness, the Buyer may be inadvertently walking into a taxable event that is not envisioned by the parties and can throw off the economics of the deal.
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Reply by a searcher
from University of San Francisco in Vancouver, WA, USA
@Derek what was your final structure?/offer

I'm trying to understand if SBA will allow seller note NOT on full stand-by IF the 10% equity injection is met OR as Ian mentioned above you just build it into the underwriting as the offer?

For example:
- 2mil price
- I bring $200k

Then there is a separate sellers note that has to meet certain requirements otherwise forgiven over 3 year period.
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