Forgivable Seller Note Explanatory Materials?

October 11, 2021

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Rockford, MI, USA

I'm working with a business owner and we're considering a forgivable seller note for part of the acquisition structure. The seller isn't familiar with the structure of a forgivable seller note, so I've been trying to find some materials (website posts, documents, etc.) that give a more detailed explanation. Part of this is to assure the Seller that this structure isn't nefarious in nature and used a means to manipulate the price. If anyone has any materials they could provide or point me to for reference I'd be grateful -- thank you!

Reply by a lender
from The University of Chicago in Schaumburg, IL, USA

Concurring; while the SBA does not permit earnouts (i.e. payment tied to value increase), reduceable/forgiveable seller notes tied to value decrease (e.g. decrease in revenues, EBITDA, revenues from a key customer, etc. vis-a-vis a historic or previously achieved level) are fine. The note, itself, is the same as any other seller note other than a clause or section specifying the terms of the possible reduction or forgiveness. I am not aware of any white papers on the subject but would be pleased to chat about it.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

Seller note Claw backs and escrows are allowed under SBA as long as the agreement terms aren’t based on earnout metrics such as increased Ebitda. If the metric is based on ensuring status quo or historical performance, then would be allowable such as in the case Peter presents on wanting to protect against loss of key customers. Benchmarks could be based on historic TTM and retention of employees as two more suggestions.

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