Seller Note Forgiveness Terms

January 29, 2024

by a searcher from Arizona State University in Los Angeles, CA, USA

Hi all!

I've searched the past posts for examples here but wasn't able to find anything super useful. I'm pre-LOI on a CPG deal where revenue and SDE has jumped 300% in the last 3 years, and 75%+ in the last year alone YoY. I'm worried about the current levels being sustainable and my DSCR depends on it so am considering structuring the offer with a 20% forgivable seller note (5yr term). The remaining 80% would be a mix SBA 7a loan and cash. I'm hoping to get thoughts on the following forgiveness terms - each year of term, 20% of loan value may be forgiven if EBITDA does not exceed 90% of###-###-#### excluding changes in Owner's Salary). Thankfully, the deal has low customer concentration so that felt less applicable to tie forgiveness to. I expect the seller to have some heartburn over my influence on the business's cost structure so am open to ideas on how to navigate those conversations too. My understanding is this note structure is allowed with SBA as well but have put the same thoughts in front of the lenders I'm chatting with. Appreciate any advice/guidance in advance!

Reply by a searcher
from Massachusetts Institute of Technology in Boston, MA, USA

Thanks Luke - some notes 1) Use Top line or Gross Margin as a metric to forgive not EBIDTA 2) what you are stating in terms of the math, sounds like a cliff, either the note is fully forgiven or not at the 90%, USE a grade not a cliff, 3) if you’d like I can send you some language around a forgivable seller note redacted 4) see, in the best manner possible, to tie the future risk you foresee, to the structure you put together 5) there is something which is unclear to me in your structure, you are considering a 20% forgivable note and the rest you state is a mix of SBA loan and cash, the 20% is therefore what can be forgiven, you are not implying that the 20% forgivable note can help address or lead to some type of forgiveness on the SBA loan which you are putting in another bucket

Reply by a searcher
from The University of Michigan in 1075 Gills Dr, Orlando, FL 32824, USA

I agree with others that you'll have trouble getting the seller to agree to a 5 year note. ^redacted‌ is correct that you should determine the size of the note based on the 2021 numbers. If the revenue declines and the note is forgiven, will you still be able to pay your debt if the note is only 20%?

I would also suggest making the forgiveness more of a sliding scale. Something like a 10% drop in revenue forgives 5% of note, a 15% drop forgives a cumulative 10%, 20% drop forgives a cumulative 15%, etc. The seller is more likely to agree to that structure.

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