How do you determine the structure of a forgivable seller note?

November 05, 2024

by an member from University of Washington in Mount Vernon, WA, USA

Hello all,

What are the considerations when structuring a forgivable seller note in an LOI?
Is the entire seller note usually forgivable? If so, how often do sellers agree to that?
Does the size of a seller note make trying to make it forgivable difficult for the seller to agree to?

I'd love to hear your experiences with these. Thank you!

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Reply by a searcher
from Roosevelt University in Boston, MA, USA

When structuring a forgivable seller note in an LOI, it’s crucial to balance the buyer’s need for performance incentives with the seller’s desire for guaranteed payout. Forgivable seller notes are often tied to specific performance milestones or timelines, where forgiveness may occur if targets like revenue thresholds or customer retention are met. Fully forgivable notes are less common, and sellers tend to agree more readily when they have a role in the business post-sale or see alignment with the buyer’s goals. Generally, shorter forgiveness timeframes are more attractive to sellers, while buyers might prefer longer periods to ensure sustained business stability. As ^redacted‌ mentioned, this all depends on the dynamics of the deal.

The size of the seller's note can also impact the seller's willingness to agree to forgiveness, with larger notes often being partially forgivable. Sellers may be open to such terms if they’re highly motivated to close or if there are additional incentives, such as equity or board roles. In practice, forgivable notes work best when both parties are confident in the business’s success and share a vision for its future, especially in cases with smaller notes or when the seller continues to have an active role after the sale.

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

Hi ^redacted‌, this will depend on the circumstances of the deal. In particular, the risks you are trying to mitigate. For example, if you have customer concentration risk centered on a single client, you could make the note forgivable if that client were to leave in an amount equal to the revenue that the client brings in over several years. This is just an example. And, of course, even if the seller were to agree to forgivability in principle, he or she may argue about the size of forgiveness. That said, where possible, base forgivability on hard metrics e.g., revenue rather than EBITDA. You'll be less likely to get into a fight with the seller about whether or not the trigger has been hit.

Hope that helps. Feel free to reach out to discuss further. We're a law firm focused on this space and are always happy to answer questions. Either DM me here, or reach out directly at redacted

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