Seller Earn out as a bypass to the SBA stand-by rule

by a searcher from University of Arkansas at Fayetteville

4 years ago

I am considering all avenues to leveraged buy-outs utilizing SBA loans. Is a seller earn out for a portion of the business considered a bypass to the SBA's stand-by rule for inferior debt? 

This would allow the seller to potentially get their equity paid out sooner than  a seller note and would technically qualify as equity to the SBA.

4 likes
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6 comments

searcher

Thanks for the post and the feedback. I was not aware that SBA didn’t allow payouts. This is very helpfully.

4 years ago | like reply | 0 likes

intermediary from Indiana University at Bloomington

A seller can not have at closing an employment agreement or consulting contract for longer than 12 months. This is one of the golden rules. Another golden rule is there can be no earnout of any kind. You can use an erosion clause on performance with a seller note if it is written well. This is much better for the buyer than an escrow as you don’t have to come up with the cash. That note can be paid out a lot faster based upon cash flow. If you don’t have 10% down, then some banks on better deals will go with 5% down with a 5% seller note on full standby, interest accrued but no payments until sba is paid in full.

4 years ago | like reply | 6 likes

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