I have a 12 month consulting agreement with the seller and 5 year non compete after. Are there any typical or recommended earnest structure to incentivize seller to hit revenue milestones or other metrics? What worked best for you? This is a light manufacturing business. Revenue growth have slowed to 6% from double digits. Plan is to increase higher margin business and resume double digit revenue growth.
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Details and examples regarding Note Forgivability:
SBA prohibits “earnouts” or any sort of structure that provides for paying a seller more for a business after closing if the business hits any sort of metrics. Therefore, to make this deal SBA compliant, we need to do the reverse: we agree to pay the seller note unless the business fails to meet metrics.
Our proposal: Note forgivability + revenue stabilization period. This is more favorable to both parties since it gives a longer time horizon over which EBITDA must meet the hurdle before any amount of the note becomes forgiven. Here’s how it works.
Target EBITDA = $1.4M
Revenue Stabilization: At end of 12 months after Closing, actual TTM EBITDA is compared to Target EBITDA.
Meets or exceeds? Loan is paid off as agreed.
Fails to meet? Note on full standby for 12 months.
If full standby, then re-assess TTM EBITDA again in 12 months.
Meets or exceeds? Loan is paid off as agreed.
Fails to meet? Note on Full standby again for 12 months.
Note Forgiveness:
If full standby again, then re-assess TTM EBITDA final time at 36 months following close.
Meets or exceeds? Loan is paid off as agreed.
Fails to meet? Portion of note equivalent to difference x the multiple(pretend its a 4X multiple) is forgiven. Eg if TTM EBITDA at this stage is only $1.2M, then $###-###-#### = $200K x 4 = $800K of the note is forgiven.