Help structuring deal with SBA Loan and Earnout or Roll-over Equity?

searcher profile

September 09, 2021

by a searcher from Northwestern University - Kellogg School of Management in Chicago, IL, USA

I am a self-funded searchre and am pursuing a deal (pre-LOI stage) where the seller's expectations of growth over the next several years are creating a valuation gap that he and I are trying to solve for. We are both open to the idea of using roll-over equity or making the final purchase price contingent on future operating performance (i.e. an earnout), or even using a royalty payment per unit sold to help bridge the gap. That said, I would like to use an SBA loan to finance as much of the cash due at closing as possible and have read that the SBA doesn't allow for rollover equity or earnouts. I was wondering if there were any creative structures that would allow me to finance the purchase via an SBA loan and also allow the seller to participate in some of the post-close growth of the business?

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commentor profile
Reply by a searcher
from University of Florida in Washington, DC, USA
Short answer, as I understand the SBA program requirements (albeit administered differently by different lenders), is there cannot be any economic upside to the seller. As you noted, no held equity, no earnout in the traditional sense. What is permitted is a forgivable seller note, but it has to be based on a metric that the business has previously achieved. (E.g. seller note that is forgiven if business does not return to pre-covid revenue should be ok, but a seller note that is forgiven if the business doesn't achieve 25% growth for the next 3 years probably won't fly.)

As Ted mentioned above, best to work with individual lenders, as each will implement the SBA program a little bit differently.
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Reply by a lender
from Northwestern University in Chicago, IL, USA
Hi Dodge: I've done deals where forgivable seller notes were involved. Sometimes there are 2 notes, one that is fixed, the other which is variable (i.e. forgivable). The SBA does not want the purchase price going up post-close, but the staying the same or even going down is usually favorable for the borrower.

What are amounts we're talking about specifically? Feel free to shoot me an email at redacted OR give me a call at###-###-#### .
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