Earn-out workarounds? (forgivable note, side letter, erosion clause, etc.?)

by a searcher from Harvard University - Harvard Business School

4 years ago

I'm looking at a deal with significant volatility in###-###-#### 2x previous years), and unsurprisingly the owner claims the change the structural and wants to be paid for it. I'm looking for a way to de-risk the deal based on an "earn-out" while using an SBA loan. 

The easy answer here is that earn-outs are explicitly prohibited, but I keep hearing about potential work arounds where you can get the same function without it being considered as an earn-out by the lender. 

Thanks in advance for the help.

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searcher from University of Texas at Austin

How did this work out?

2 years ago | like reply | 0 likes

searcher from University of North Texas

In my VC days, using a variation of what ^Searchfunder member‌ did to make everybody happy. For me, this was in Canada so clearly different rules, no SBA loan (BDC in that case), etc. With respect to the the numbers, top line is the cleanest as you'll have the most control over variable. Top line (revenue) is straight up. The other observation is how much control do you have. By that I mean if the owner is an employee or still active after you close the deal, creating top line with crappy margins get him/her over that revenue number but is it 'good' revenue meaning good margins, contribution, etc. Good luck and happy to provide more perspective as you'd like. --@----.com

4 years ago | like reply | 0 likes

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