Language for forgivable seller note?

February 13, 2024

by a searcher from Harvard University in Philadelphia, PA, USA

Hello from a snowy Philly! I'm putting together an LOI that has a forgivable seller note. I know you can tie forgiveness to revenue, gross profit, EBITDA, or key customer / employee performance, but I actually haven't been able to find any specific contract language on this. Does anyone have a sample clause for a forgivable seller note, perhaps from a past LOI, that they would be willing to share?

Thank you!!!

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Reply by a professional
from University of Tulsa in Denver, CO, USA

Disclaimer: I am a lawyer, but not your lawyer-this is not legal advice "The Purchase Price adjustment, if any, under this Section shall be effected by a corresponding reduction to the principal amount of the Note. By way of example only, (x) if the Actual Revenue during the Measurement Period is [$NUMBER], then the Purchase Price shall be decreased by [$NUMBER]. [For purposes of this Agreement, “Actual Revenue” shall mean the gross amount accrued by Buyer from the Purchased Clients [(including price increases and service expansion)] during the Measurement Period for tax, accounting, payroll, and consulting services, less discounts, Taxes (including, without limitation, sales, or transfer Taxes) refunds, rebates, and returns, allowances, and governmental charges.] Any downward Purchase Price adjustment will be considered a ‘qualified purchase price reduction’ and not Cancellation of Debt Income as defined by IRC section 6050P and the parties agree to take any subsequent steps that are reasonably necessary to preserve the status of the Purchase Price adjustment as a non-taxable event'

Reply by a searcher
from University of Pennsylvania in Miami, FL, USA

iii. $1,500,000 held as a forgivable Seller note (“Note 2”) on full “stand-by” as defined by the US Government, Small Business Administration with no interest or principal payments for the first twenty-four months. After twenty-four months, Note 2 shall be payable and amortized over a fifteen-year period at five percent (5%) interest with a bullet payment due 10 years following the close of the transaction. Note 2 shall be pre-payable without penalty, shall be subordinated to the commercial lender(s) for the Transaction and shall be secured by a subordinated interest in the assets of FLIP. Note 2 shall be forgivable as follows: 1) $750,000 shall be forgiven if EBITDA in 2024 is less than $1,300,000; and 2) $750,000 shall be forgiven if EBITDA in 2025 is less than $1,300,000.

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