Modeling Earndowns / Forgiveable Seller's Note with SBA Financing

July 17, 2024

by a searcher from Rensselaer Polytechnic Institute in Jersey City, NJ, USA

I have been looking to utilize earndowns / forgiveable seller's notes on a few potential opportunities in order to bridge the gap.

In a recent scenario I had a listing with a large growth in revenue/EBITDA in the TTM period. Given SBA financing will be based on 2023 actual tax returns, I am looking to bridge the gap and mitigate risk with an earndown. Additionally I understand that some SBA lenders will include this obligation in the DSCR calculations assuming no forgiveness.

I'm looking for help in modeling this out so that I can identify how to structure it. If anyone has utilized this tactic successfully I would appreciate any advice.

Thank you.

Reply by a lender
in Stuart, FL, USA

Most lenders will not include the seller note payments in the DSCR for their calculations as long as there is a minimum of at least a 24-month standby period, but they will still stress test the loan.

If you mean a claw-back agreement by "earndown" there are tons of ways to structure those. Conversely, there are ways to structure earnouts on an SBA loan even though SBA doesn't allow earnouts.

Honestly, there are workarounds for almost every situation you could encounter, and lenders will allow them. You just have to know which lender to go to with each situation. Shoot me an email at redacted if you have any questions.

Reply by a searcher
from INSEAD in San Francisco, CA, USA

I don't have experience with that particular scenario, but I'm trying to do something similar with add backs where I'm using a forgivable seller note to bridge the gap between SBA-approved add backs and everything the seller wants to add back.

I spoke to Live Oak about this and they said that they would include this in their DSCR calculations even if it was forgivable. Not sure about other banks.

+8 more replies.

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