Equity Rollover and Earnout with SBA?

searcher profile

May 04, 2023

by a searcher in San Francisco, CA, USA

I'm looking at multiple deals with both equity roll overs and earnouts and I'm hoping to structure these through SBA offerings. I'm hoping to get insights from the SBA lenders here

Equity roll overs - Please share any new insights regarding SBA's new development on equity roll overs

Earnout - I hope to utilize the "Earndown" model as a substitute for Earnout (https://www.cobizmag.com/what-is-an-earndown/) and Earndown seems to adhere to SBA guidelines.

Eg: If seller wants $5M and I offer $4M with $1M as earnout, I'm looking to structure this as $1M seller note with 0% interest, and having clauses for principal reduction based on performance metrics.

Will this way of structuring an equivalent of earnout adhere to the SBA guidelines?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I agree. The final guidance has not been released yet. It is supposed to be released as of 5/11. I know some initial feedback came out of a conference last week, but I have been told from people involved that they are still going back and forth on the changes and it is all not finalized. Once it is I would be happy to connect and go through it with you. However, it may take some time for lenders to adjust their own policies reflective of it. You can reach me here or directly at redacted
commentor profile
Reply by a searcher
from Cleveland State University in Akron, OH, USA
Until the guidance is published on the non 100% equity rules everyone is just guessing.

Most "earndowns" are structured as "forgiveable seller notes". I believe the key is that the value can ONLY go down and never up. Tying to revenue is probably best IMHO.
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