Forgivable Seller Note / Structuring Question

April 18, 2025

by a searcher from University of North Texas in Dallas, TX, USA

Hi All, I'm in negotiations to purchase a franchise business which has excellent history of earnings/profitability but does not have much collateral so I wouldn't think it could go conventional. The owner has offered a forgivable seller note up to $1MM with the caveat that all remaining principal + interest on the seller note is forgiven after 5 years of payments. Is there any way to do this and still go SBA?

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

$3.5 M will e paid as follows: 1) $2.8 M cash at closing 2) $700 k in forgivable Seller Note at 0% interest, paid as x% of sales (or any other parameter) for 5 years. At the end of the 5 years, any unpaid amount will be forgiven. Law allows you to have 0% interest on contingent Notes. Interest on the full amount of Note becomes a major cash drain for most buyers. Also, make sure you can service the Note payment b/c it is after-tax $.

Reply by a searcher
from Arizona State University in Nashville, TN, USA

Yes, forgivable seller notes are ok as long as the metrics that it is based on has occurred in the past. For example, you couldn't set the note to be forgivable if future revenues had to exceed a figure that hadn't been met before (e.g. x% higher than any previously reported figure).

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