Seller Note Question SBA Compliance

by a searcher

2 years ago

I had an idea regarding a seller note structure and am curious if there are any issues with structuring this in conjunction with SBA financing. 

The seller note structure would be one where the payments are not fixed, but based on a waterfall tied to business performance. As an example, you would start with EBITDA, less any CapEx, less senior debt payments (SBA), less a predetermined cash cushion, and the remainder would be swept as a repayment of the seller note. This allows for faster seller note repayment if the business performs well but also provides protections for the buyer in an underperforming scenario. There would still be a fixed term and the balance would be due at the maturity in full if it had not already been paid down.

Any issue with a structure like this as it relates to SBA financing compliance?

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9 comments

searcher

Isn't this an earn out? I've done these before with no ceiling or floor and very simply tied it to a fixed percentage of the GROSS revenue paid monthly based on the previous month's sales. The business over performs, seller participates in the lift, it under performs, buy pays less. I was under the impression this sort of thing would not work an SBA loan.

2 years ago | like reply | 0 likes

searcher from California State University, San Bernadino

If memory serves, SBA covenants have to be linked to matching historical performance, not growth, but sounds like you could use this to cover against business failing to meet historical numbers.

2 years ago | like reply | 0 likes

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