Scaled Forgivable Seller Note - Sba Compliant

08/08/2019 Redacted Redacted

searcher Harvard University - Harvard Business School

SCALED FORGIVABLE SELLER NOTE - SBA COMPLIANT

Does anyone have an example LOI/IOI or seller note contract with language on a forgivable seller note with the value scaled to a metric? We're looking for something that would be SBA compliant. 

Thanks!

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lender California State University, Sacramento - College of Business Administration - 08/09/2019

Happy to help. Message me at [redacted] and I can share ideas depending on your situation.

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searcher The University of Michigan - Stephen M. Ross School of Business Vanderbilt University - 08/10/2019

Just closed a deal with a structure like this. My experience is that with an SBA loan the note can only be adjusted down and not up. Worked in my favor since I was able to negotiate out of the seller's upside while keeping my downside protection. Happy to discuss more, [redacted]

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searcher Harvard University - Harvard Business School University of Cincinnati - 08/14/2019

While I have not closed anything with specific language, having "negative covenants" or "ratchets" in the Seller Note is supposedly doable according to SBA Lenders. I will reach out.

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lender California State University, Sacramento - College of Business Administration - 09/05/2019

It is allowed and can really help mitigate certain aspects of the deal.

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lender University of Missouri - Columbia - 08/14/2019

Echoing Kevin's comment; the seller note can be forgiven if a performance metric is not met since it is to the benefit of the business (can't be adjusted up as this would be an earn out). The rub could be the business evaluation though. If you are trying to get the seller into something that has an upside, the business today would need to show an evaluation that supports the full amount, not projected. That can get a little sticky. email me if you have any follow-up questions. Good luck!

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searcher Babson College - F.W. Olin Graduate School Harvard University Northeastern University Missouri Tech - 09/04/2019

Colin, in terms of the metric selected, can this metric be something like Gross Profit over a[redacted]month period? If yes, could the principal balance on the Seller note be adjusted downward if the GP doesn't meet the agreed upon metric? Might a simple Y=MX+B formula be allowed?

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lender University of Missouri - Columbia - 09/05/2019

Donald, yes GP is usually a pretty good metric to use since it captures margin. Even this though can be played with depending on how you recognize your COGS so there is a potential for some disagreements (legal or otherwise) if the metrics are not down the road. On the adjustment this is a murky area and I think if you asked two different SBA field offices you might get two different or at least unequal answers. Simplicity is the key in this area. Much cleaner to do an all or nothing. I don't think a ratcheting down component would work, or at a minimum might require going through general processing v. PLP to get it blessed by the SBA. I would have to verify eligibility but it would probably be better to do two separate notes with different achievement metrics v. one note that is a moving target. We can get you an answer if you want to email me and discuss the details [redacted]

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intermediary Wake Forest University - Schools of Business Emory University - Goizueta Business School - 08/14/2019

One other item to work into your language, just so that everyone is on the same page, is that Seller Finance debt forgiveness, when it is a "A qualified purchase price reduction given by the seller of property to the buyer", is not a taxable event: http://www.irs.gov/taxtopics/tc431.html

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searcher Harvard University - Harvard Business School University of Cincinnati - 09/05/2019

SBA compliant I found is sometimes in the eye of the beholder of the SBA lender. Some say anything that changes the purchase price (note notional value) is not permitted even if it is to the benefit of the business. One way to get around it is to use "negative covenants". If certain targets are not met such as revenue growth or ebitda margin then the interest goes to 0% or negative. Maybe the Term changes from 7 years to 50 years. Then time value of money kicks in. A dollar paid back 50 years from now is not worth much....

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lender - 09/05/2019

We have actually tried this with the SBA on a deal that went to the SBA for approval for other reasons. (We typically process PLP) We were told that anything like this was ineligible for SBA since it is basically adjusting the purchase price after closing, even if it was for the benefit of the buyer.

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