Reverse Earnout

searcher profile

June 28, 2021

by a searcher from Cornell University in Sunnyvale, CA, USA

I’m trying to find ways to keep the seller’s skin in the game on an SBA deal, and believe that a reverse earnout might be the best and most compelling option. The business took an ~8% top line hit during COVID, so I plan to use a reverse earnout to get the business back to its historical sales levels. Has anyone successfully employed a reverse earnout on an SBA deal? And if so, would you be willing to share how the language was written and how it was incorporated into your purchase agreement?

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commentor profile
Reply by an intermediary
from Harvard University in Nashville, TN, USA
I don’t like the premise of the question, that you need for the seller to have “skin in the game.” Yes, I know that’s a common phrase but the most sellers they’ll tell you it’s insulting. If you don’t think you’re up for running the business, don’t buy it. If you think it’s overpriced, don’t buy it. If you can’t complete a thorough due diligence to understand the business, don’t buy it. The seller has had “skin in the game” since the day they got started. They don’t need to prove to you that they have “skin in the game.” My advice, never use that phrase around a seller (or a capable intermediary). You’ll achieve nothing productive and likely set your process back a few steps.
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Reply by a searcher
from Harvard University in Boston, MA, USA
Curious to follow this as well. From what I understand, reverse earnouts will be even trickier to resolve than regular earnouts (and to your detriment - as in, if the money isn't in escrow you aren't ever going to see it again). I was also under the impression that an earnout on growth - even growth "back" to longer term historicals would not get underwritten in an SBA deal. Might be worth considering a forgivable seller note?

Semi on-topic thread - https://www.searchfunder.com/post/scaled-forgivable-seller-note-sba-compliant

Hopefully a real expert will roll along.
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