Creative ways of doing SBA compliant Earn Outs (without calling them so)

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March 07, 2025

by a searcher from Harvard University - Harvard Business School in Austin, TX, USA

SBA 7a doesn't allow performance based payouts (earn outs) as part of the loan structure. Given many business that we see have huge volatility, I was wondering if any one have done earn outs without calling them that way and still have gotten their deal structure compatible with SBA 7a?
Maybe a side agreement? Happy to hear your thoughts.

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commentor profile
Reply by a lender
from University of Southern California in Los Angeles, CA, USA
Hi Bhushan - Nice to meet you. The way to do this is to structure this as a forgivable seller note. The way these are structured is to have a performance period or tracking period where you can make the note forgivable based on hitting a certain revenue and profit metric. Some banks allow 1 year of performance period and some banks allow more than 1 year. You can then have a longer amortization period. Some banks also allow you to have a forgivable seller note on partial standby (2 years of no interest being paid but it can accrue).

I’d love to help you find the right SBA lender and structure this deal. We work with all the major SBA lenders. The bank pay us after your loan closes, so this is a 100% free service for you. You can reach me here or directly at redacted You can also click here to schedule a meeting with me: https://cal.com/ishan-jetley-3d73m8/30min. Happy to help!
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Interest on Forgivable Notes is very expensive to buyer. Interest can be zero.:
Each situation requires a different structure. Here is an example from an LOI approved by the 2 banks. Seller expected high growth:
The Forgivable Note of Two Million Dollars ($2,000,###-###-#### will be a 10-year note at no interest, payable annually based on EBITDA exceeding the target EBITDA amount of One Million Two Hundred Thousand Dollars ($1,200,000) with 20% of the excess, to be paid to Sellers within 90 days after the end of the previous year. EBITDA will be calculated consistent with Company’s prior practice. Further, any fees paid to Buyer or its portfolio companies, or its owners and management will be added back in calculating EBITDA. Seller will have access to Company’s monthly financials. Any unpaid amount of this Note at the end of 10-year will be forgiven.
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