Forgivable Seller Notes

August 22, 2024

by a searcher from University of South Carolina in Charlotte, NC, USA

I am currently structuring a SBA financed offer with a forgivable seller note. I have a general outline for how I would like to structure the note, but would like to see how others have structured similar notes in the past.

For reference, there is one customer that contributes a large amount of the revenue. To mitigate this risk I am adding the forgivable note and have thought about ways of attaching it to the specific customer more than the overall revenue. For example, if the large customer stopped working with this business post acquisition, but I still maintained revenue levels then I would like some type of claw back clause in place to not have to pay out most or all of the note.

Looking for more detail on the forgivable seller note strategy in general and would appreciate any dialog.

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Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, it sounds like you're on a good path. There is nothing that mandates forgivability being tied to revenue. When structuring SBA compliant seller notes, forgivability must be tagged to historic performance. But you'll be doing that here--the loss of a key client account. Will forgivability span the term of the note or be limited to the first few years post close? It's common for sellers to rep that material customers won't leave within 3 or so years. If I'm the seller, I will want to limit this forgivability to the same period (for that matter, the seller will want to make sure that forgivability is the sole remedy in the case of this material customer leaving). Finally, another way of getting at this issue would be with a purchase price escrow. It's a harsh remedy. But if the risk of this key client leaving is material, it's preferable to forgivability, as it'll help with immediate cash flow rather than reduce future debt payments. Happy to discuss further. DM me here or reach out directly at redacted

Reply by a lender
in Falmouth, MA, USA

Thanks for the tag ^redacted‌. I've had clients on multiple occasions trying to solve an identical issue. Please determine the following: 1) The amount of profit coming from the client and its impact on the purchase price. 2) The likelihood of losing that client. 3) The timeframe for which you need to be protected against that risk. For example, a searcher was preparing an LOI where one client comprised 30% of the total revenue. We structured a five-year forgivable note. Please feel free to reach out for more detailed information on the forgivable language.

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