SBA project cost calculation with forgivable seller note: included or excluded?

May 05, 2026

by a searcher from University of Pennsylvania - The Wharton School in Richmond, VA, USA

I'm working through deal structure questions on a current acquisition and getting mixed answers from different sources. Would love perspective from anyone who has closed a deal with this or a similar structure. Deal structure: - Firm purchase price (cash to seller at close + standby seller note as equity injection) - Forgivable seller note ABOVE firm price, designed to bridge from firm price to seller's asking valuation - Forgivable note structured as 5-year interest-only with balloon, performance contingent based on Y1 and Y2 revenue and client retention - SBA 7(a) financing 90% of project cost, 10% equity injection split between buyer cash and seller standby note My current model treats the forgivable note as follows: - EXCLUDED from project cost (so equity injection is calculated on firm price + closing + SBA guarantee fee only) - INCLUDED in DSCR calculations (since IO payments and the balloon are real cash outflows) Questions for the community: Is this the standard SBA convention for handling forgivable seller notes that sit above firm price? Or do lenders typically include the forgivable note in project cost (which would meaningfully increase the equity injection requirement)? Has anyone closed a deal where the forgivable note was excluded from project cost but included in DSCR? Any pushback from the lender or SBA on this treatment? Are there specific SBA SOP citations that clarify how forgivable seller notes should be treated in project cost vs. cash flow analysis? Thanks in advance!

Reply by a lender
from Cornell University in Los Angeles, CA, USA

Hi Anon - nice to meet you. Lots of good comments here. I've worked on several SBA 7(a) deals with forgivable seller notes. To put it simply, yes, the forgivable note must be included in total project costs. No gray area. The SBA SOP says total project costs = all costs to complete the change of ownership, regardless of source of funds. Your equity injection is calculated on the full number. And there's an important caveat. Banks always assume the seller will NOT be forgiven and include the full note in their cash flow analysis. That's not an SBA requirement, just how lenders underwrite. They stress to worst case. So you're carrying full debt service through DSCR with no credit for forgiveness. Always structure deals to maximize lender appetite, not shrink the pool. On the forgiveness triggers, be very careful. SBA prohibits earnouts. The purchase price must be fixed and determinable at closing. Your note is fine as long as it's structured as forgiveness of an existing obligation, not additional consideration for performance. Best practice: use clear tranches with specific decline thresholds. Example: if revenue drops below $X in Y1, Tranche 1 is forgiven. If revenue falls below $X in Y2, Tranche 2 is forgiven. Clean, measurable, tied to downside protection. That's what lenders and SBA want to see, not "seller earns more if things go well." We have a lot experience financing various companies via the SBA. If you ever need help reviewing a deal, I am happy to help. We work with all the major SBA lenders. The bank pay us after your loan closes, so this is a 100% free service for you. You can email me directly at redacted or schedule a meeting with me: https://cal.com/francodeguzman/30min. Look forward to chatting!

Reply by a professional
from Michigan State University in Brighton, MI, USA

The way I’ve seen this play out before was less about what the note is called and more about how it behaves economically under underwriting. If you step back, there are really two questions lenders seem to anchor on: 1. Is this truly contingent or effectively deferred purchase price? If the forgiveness is tied tightly to performance (revenue, retention, etc.), I agree it starts to look like an earnout in substance, which is where you run into the “fixed and determinable” issue @redacted‌ mentioned. But if there’s any reasonable expectation that the seller will receive that value, lenders tend to treat it more like total consideration regardless of the structure. 2. What happens under downside scenarios? Even if it’s excluded from the project cost on paper, most credit teams I’ve seen will still underwrite it: - Either by pulling it into total sources/uses, or - by stressing DSCR (assuming those obligations hit) So you could in theory end up in a place where it may be modeled as excluded, but underwritten as included. Which is probably why you’re seeing different answers, as it’s less a policy question and more a credit interpretation question. The other thing I’d flag (which @redacted‌ touched on) is that once the note becomes necessary to “get the deal done,” it’s very hard to argue that it is not part of the effective purchase price from a lender’s perspective.

+12 more replies.

Join the discussion