Earnout vs. forgivable seller note

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July 17, 2021

by a searcher from University of Texas at Austin in San Francisco, CA, USA

I’m working on a deal where part of the total purchase price is tied to future revenue. What should I consider in using an earnout vs. a forgivable note or something else?

There won’t be any SBA debt and I can manage cash flow in either scenario. So I’m curious about tax, accounting or legal issues that I should be thinking about.

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Reply by a professional
from New York University in New York, NY, USA
From a tax perspective, forgiving debt can be taxable (to the debtor). In general, an earnout gets capital gains treatment, while repayment of a note could partially be ordinary income that's taxed at a higher rate.
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Reply by a professional
from University of Illinois at Chicago in Deerfield, IL, USA
I moderated a panel and prepared an article on the topic for the AM&AA earlier this year that I'm happy to share. Contact me at redacted
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