Downside protection for performance commitment

April 20, 2023

by a searcher in Hồ Chí Minh, Thành phố Hồ Chí Minh, Việt Nam

Hi all,

We are pushing for a deferred payment structure in which we would like to input a downside protection mechanisms relating to the future performance of the company. An option we are considering is an adjustment to the price.

It would be appreciated if anyone can share the experience in similar structures.

TIA,

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Reply by a searcher

Hey Thai. If you are using an SBA loan you'll be unable to use an earnout but you can use claw back language.

So for example, let's say you believe the business is worth 4mm and the owner thinks the business is worth 5mm. You could do 4mm on the SBA with 1mm in owner financing. In this scenario you could tie the owner note to certain performance metrics. These metrics could be whatever you want to protect against. Maybe its revenue or it could be customer concentration risk or key employees staying on.

If those metrics are not met you could have language that pauses payments on the seller note for a period of time or you could have language that reduces the overall seller note.

I hope that helps. Please feel free to reach out if you'd like to know more.

Reply by a professional
from Villanova University in West Chester, PA, USA

Absolutely, both of these are great ideas. I perhaps incorrectly assumed the deal isn't in the US based on your location. If the deal is in the U.S. and you're looking for an SBA loan, generally a clawback would be the way to go. You could also minimize the downside risk by getting contracts in place or having the seller retain or rollover equity with an option to purchase the additional equity in the future at an agreed upon calculation with a maximum of today's purchase price.

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