Constructing a Forgivable Sellers Note
March 10, 2025
by a searcher from Rensselaer Polytechnic Institute in Jersey City, NJ, USA
Currently working through an LOI offering using SBA debt. I'm looking to protect downside risk of customer concentration using a forgivable sellers note. The intention is to tie the note forgiveness to revenue generated by the top customer. The forgiveness percentage would be based on a sliding scale of the historical revenue target. For example if 50% of the historical revenue target is achieved then 50% of the note would be forgiven,
What suggestions would you have in determining the amount of the sellers note. I have considered options from modeled EBITDA reduction only, to purchase price adjustment (EBITDA reduction x multiple), to modeling only what would preserve debt service coverage ratios. I'm mindful that this can reduce sellers cash at close and present seller risk that may not create for a win win deal.
How long is typical for a forgiveness period?
Let me know what you all have found successful.
from University of Michigan in Greenwood Village, CO, USA
from University of Southern California in Los Angeles, CA, USA
Banks have different rules for the length of this performance period. Some banks allow only one year, while others allow multiple years. It’s helpful to talk to several banks to see what each offers. Another useful approach is to involve the seller through an equity roll. This lets the seller stay connected to the business longer than a year and allows payments to the seller as sales commissions or bonuses based on certain contracts or customer retention. Because each bank handles forgivable seller notes differently, reaching out to multiple lenders will help clarify your options and structure the deal effectively.
I recently worked with the searcher from search funder that bought an HVAC business that had a large pipe of opportunities that had a 2024 revenue spike that the borrower didn’t think would continue in###-###-#### We were able to find a bank that that allowed a 5 year performance period where 20% of the loan was forgiven each year. The rate was higher but for the borrower, the 5 year performance period on the forgivable seller note was more important.
I’d love to help you find the right SBA lender for this deal. 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 reach me here or directly at redacted You can also click here to schedule a meeting with me: https://cal.com/ishan-jetley-3d73m8/30min. Look forward to working together!