If you’re buying a business with an SBA loan and the seller wants an earnout — stop. The SBA won’t allow it. But before you walk away from the deal, there’s a workaround that accomplishes nearly the same thing. I’m going to break down exactly why the SBA prohibits earnouts, what you can do instead, and how to structure it so both sides are protected.
This is the kind of deal structuring knowledge that separates buyers who close from buyers who don’t. Most buyers — and honestly, a lot of brokers — don’t know this. Let’s fix that.
What Is an Earnout in a Business Acquisition?
Before we get into the SBA rules, let’s make sure we’re on the same page about what an earnout actually is.
An earnout is a contingent payment to the seller based on the future performance of the business after the sale closes. It’s essentially a “bonus” tied to hitting specific milestones — usually revenue or profit targets.
Here’s a simple example: You’re buying a business for $2 million. The seller says, “I want $2M, but I’ll take $1.8M at closing. If the business hits $2.5M in revenue in year two, you pay me an additional $200K.”
That $200K is the earnout. It’s contingent — meaning you only pay it if the business performs. Sellers like earnouts because they can get a higher total price. Buyers like them because they reduce risk: if the business underperforms, you pay less.
In conventional (non-SBA) acquisitions, earnouts are common. Private equity deals use them all the time. But when an SBA loan is involved? That’s a different story entirely.
Does the SBA Allow Earnouts? The Direct Answer
No. The SBA does not allow earnouts in SBA-financed business acquisitions. Period.
If you’re using an SBA 7(a) loan to buy a business, you cannot include an earnout as part of the purchase agreement. The SBA will reject the deal structure, and your lender won’t fund it.
This catches a lot of first-time buyers off guard. They negotiate what they think is a great deal with the seller, bring it to the lender, and get told to go back to the drawing board. That’s weeks — sometimes months — of wasted time.
So why does the SBA have this rule? There are four key reasons.
Why the SBA Prohibits Earnouts
1. All Deal Terms Must Be Finalized at Closing
The SBA requires every element of the transaction to be fully disclosed and finalized before the loan closes. That means the total purchase price, the payment structure, seller notes, equity injections — everything. An earnout, by definition, is not finalized at closing. It’s contingent on future events. That violates the SBA’s requirement for deal certainty.
2. Earnouts Create Contingent Liabilities That Complicate the Debt Structure
When a lender underwrites an SBA loan, they need to model the borrower’s debt service coverage ratio (DSCR). They need to know exactly how much debt the buyer is carrying and what the payment schedule looks like. An earnout creates a potential future liability that could change the buyer’s total debt load after closing. The lender can’t underwrite what they can’t quantify.
3. Misaligned Incentives Between Buyer and Seller
Earnouts can create perverse incentives post-closing. If the earnout is tied to revenue, the seller (who may still be involved during a transition period) might push for short-term revenue gains that hurt long-term profitability. Or the buyer might deliberately suppress performance to avoid triggering the earnout payment. The SBA wants clean transitions, not structures that pit buyer and seller against each other after the deal closes.
4. The Lender Needs an Exact Purchase Price Upfront
This is the most fundamental issue. The SBA lender is lending against the value of the business. They need to know: What is the purchase price? What is the loan-to-value ratio? How much equity is the buyer injecting? An earnout makes the total purchase price a moving target. That’s unworkable for SBA underwriting.
The Workaround: Forgivable Seller Notes
Here’s where it gets interesting. While the SBA bans earnouts, it does allow forgivable seller notes — and a properly structured forgivable seller note can accomplish nearly the same goal as an earnout.
This is the insider workaround that experienced SBA brokers use to bridge the gap between what buyers want (downside protection) and what sellers want (maximum value for their business).
How a Forgivable Seller Note Works
Instead of an earnout that says “pay more if the business does well,” you flip the structure. The seller carries a note that says “this debt goes away if certain conditions are met.”
Here’s the basic structure:
- The seller carries a promissory note as part of the deal — say $200K
- The note includes forgiveness provisions tied to specific, clearly defined conditions
- If those conditions are met, the note is forgiven — the seller effectively gives back that portion of the purchase price
- If the conditions are not met, the buyer pays the note as originally agreed
Think about what this accomplishes. With an earnout, the buyer pays more if things go well. With a forgivable seller note, the buyer pays less if things go well (because the note is forgiven). The economic outcome for the buyer is similar — downside protection — but the structure is SBA-compliant because the total purchase price is fixed and known at closing.
Common Forgiveness Conditions
The conditions tied to the forgivable note need to be specific and measurable. Here are the most common ones we see in deals:
- Seller transition completion: The seller agrees to stay on for 3-6 months to ensure a smooth handoff. If they complete the transition, the note is forgiven.
- Key employee retention: Certain critical employees must remain with the business for 12 months post-closing.
- Reps and warranties holding true: If the seller’s representations about the business (financials, customer contracts, equipment condition) prove accurate, the note is forgiven.
- No major customer loss: If the top 5 customers (or customers representing X% of revenue) are retained for 12 months, the note is forgiven.
- No undisclosed liabilities: If no material liabilities surface that the seller failed to disclose, the note is forgiven.
The key principle: earnouts are forward-looking (“pay me if the business grows”), while forgivable seller notes are backward-looking (“I’ll give this back if what you told me was true”). The SBA is fine with the latter.
Real Deal Example: How This Looks in Practice
Let’s walk through a real-world deal structure so you can see exactly how the numbers work.
The deal: You’re acquiring a home services business for $2,000,000.
Without a forgivable seller note:
- SBA 7(a) loan: $1,800,000 (90% financing)
- Buyer equity injection: $200,000 (10%)
- Total: $2,000,000
With a forgivable seller note (the smart structure):
- SBA 7(a) loan: $1,500,000 (75%)
- Standard seller note: $300,000 (15%) — on full standby for the entire term of the note
- Forgivable seller note: $200,000 (10%) — forgivable if the seller completes a 6-month transition and key employees stay for 12 months
- Total purchase price at closing: $2,000,000 (fixed and known)
What happens next:
Scenario A — Everything goes well: The seller completes the 6-month transition. Key employees stay. The $200K forgivable note is forgiven. Your effective purchase price drops to $1,800,000. You saved $200K because the transition went smoothly — exactly the kind of protection an earnout would have provided.
Scenario B — Problems arise: The seller bails after 2 months, or three key employees quit. The forgiveness conditions aren’t met. You owe the full $200K on the seller note. But here’s the thing — you budgeted for this. The SBA underwrote the deal at the full $2M purchase price. You’re not in trouble; you just didn’t get the discount.
This is the beauty of the structure. It gives you upside (potential forgiveness) without creating any uncertainty in the deal for the SBA lender.
Rules for Forgivable Seller Notes in SBA Deals
You can’t just slap a forgivable seller note into any deal. There are specific SBA requirements you need to follow:
- Full disclosure to the lender: The forgivable seller note and all its terms must be disclosed to the SBA lender. No side deals. No handshake agreements. Everything on paper, everything in the closing documents.
- Full standby period: The seller note (forgivable or not) must be on full standby for the entire term of the note. That means no principal and no interest payments to the seller during the standby period. The SBA loan gets priority.
- Clearly defined forgiveness conditions: Vague conditions won’t fly. “If the business does well” is not a forgiveness condition. “If the seller completes a 6-month transition period as defined in the Transition Services Agreement dated [X]” — that works.
- Fixed purchase price: The total deal value must be fixed at closing. The forgivable note is part of the purchase price. If it’s forgiven, the effective price decreases — but the stated price at closing is set in stone.
Other Ways to Protect Yourself Without Earnouts
Forgivable seller notes are the most powerful tool, but they’re not the only way to build protection into an SBA deal. Here are four more strategies that experienced buyers use:
Seller Transition and Consulting Agreement
Require the seller to stay on for 3-12 months post-closing as a consultant. Pay them a reasonable consulting fee. This ensures continuity, protects customer relationships, and gives you time to learn the business. Most SBA lenders actually prefer to see a transition agreement in the deal.
Escrow Holdbacks
A portion of the purchase price is held in escrow for a defined period (typically 6-12 months). If any undisclosed liabilities surface or if specific conditions aren’t met, the buyer can claim against the escrow. This is straightforward, SBA-compliant, and gives you a financial cushion.
Reps and Warranties with Indemnification
The seller makes formal representations about the business — accuracy of financial statements, condition of assets, status of contracts, no pending litigation. If any of these turn out to be false, the seller must indemnify the buyer. This is standard in acquisition agreements and works perfectly within SBA guidelines.
Non-Compete Agreements
The seller signs a non-compete preventing them from starting or working for a competing business for a defined period (typically 3-5 years) within a defined geography. This protects you from the seller turning around and stealing customers. Non-competes are expected in SBA acquisitions and should be part of every deal.
Why This Matters: Don’t Let a Deal Die Over Structure
Here’s what I see happen all the time. A buyer and seller agree on price. The seller wants an earnout for protection or to maximize their payout. The buyer’s attorney or a less experienced broker says “SBA doesn’t allow earnouts” — and the deal falls apart.
That’s a deal dying over structure, not substance.
If you’re negotiating a deal and the seller wants an earnout, don’t walk away. The underlying need — performance-based pricing, risk sharing, transition protection — is completely legitimate. You just need to restructure it into an SBA-compliant format.
That’s where working with the right SBA broker makes all the difference. At GoSBA Loans, we’ve structured hundreds of acquisition deals. We know exactly how to take an earnout-style arrangement and restructure it into a forgivable seller note that protects the buyer, satisfies the seller, and gets approved by the lender.
Why GoSBA Loans Is the Right Partner for Your Acquisition
Structuring SBA acquisition deals is what we do every single day. Here’s what sets us apart:
- 50+ lender network: We don’t work with one bank. We match your deal to the right lender from a network of over 50 SBA-approved lenders — including lenders who are experienced with forgivable seller notes and complex deal structures.
- $320M+ funded in 2025: We’re not theoretical. We’ve closed over $320 million in SBA loans this year alone. We know what gets approved and what doesn’t.
- 100% free service: Our service costs you nothing. The lender pays our fee at closing. You get expert deal structuring, lender matching, and full support through closing — at zero cost to you.
- Free business plans and financial projections: Need a business plan or financial projections for your SBA loan application? We provide them free of charge — a $2,500 to $5,000 value. This alone can be the difference between approval and denial.
If you’re buying a business and the deal involves any complexity — earnout requests, seller financing, multiple entities, partner buyouts — you need a broker who’s seen it all. That’s us.
Ready to Structure Your SBA Acquisition Deal?
Don’t let a fixable structuring issue kill your deal. Whether the seller wants an earnout, you need help with a forgivable seller note, or you just want to make sure your deal is structured for SBA approval — we’re here to help.
Contact GoSBA Loans today for a free, no-obligation consultation. Tell us about your deal, and we’ll show you exactly how to structure it for maximum protection and SBA approval.
Your acquisition is too important to get the structure wrong. Let’s get it right.
