Purchase Price Adjustments & SBA 7A Loans

searcher profile

February 28, 2019

by a searcher from New York University - Leonard N. Stern School of Business in New York, NY, USA

Hello - has anyone had any experience in the past with incorporating purchase price adjustments into a transaction financed via an SBA 7a loan? 

In my case, we were thinking to do a holdback paid after 12 months based on a certain percentage of customers doing a certain level of business with the company next year. I've heard contrasting views from other searchers, lawyers, active SBA lenders, etc so, I'm relatively confused as to what the right answer is. I know some folks have used the seller note as a proxy to hold back against, but that's not what we're trying to do. Thanks for the help!

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commentor profile
Reply by a searcher
from Michigan State University in St. Louis, MO, USA
Amman, it's tough to do an earnout with SBA, and that's what you're describing. Seller can't have the level of authority in their former company that would be needed to achieve the milestones stipulated in the holdback. So they will probably be worried to agree to it because they will feel disempowered in their ability to determine their own fate. SBA will not guarantee the earnout. There are workarounds: if you finance the full amount up front, and put it in a sequestered account, you can pay it when the milestones are achieved, and if they are not achieved, you just keep the money. You'll have to find a lender that will work with you on that. Rather than trying to make SBA conform to your earnout, perhaps you can explain why there is an earnout, what issue you're trying to address with it, to ascertain whether there is another mechanism by which you may address that risk.
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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
i can see 2 possibilities:
1) increase the price of the deal and increase the seller note by that corresponding amount. assuming the company hits targets the seller will get the full amount of seller note. You will also need to account for this in the 10% equity

2) similarly, i believe you can do an earn-out with an SBA loan. The bank will consider the total earn-out as part of the total purchase price and you will need to include that in your minimum 10% equity calculation.

Hope this helps.
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