SBA rules · SOP 50 10 8.1
Are earnouts allowed in an SBA business acquisition?
Seller earnouts are prohibited in an SBA change of ownership, but performance-based buyer rebates and working capital true-ups are permitted.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Earnout prohibition: Seller earnouts are explicitly prohibited in change of ownership transactions.
- Buyer rebates: Rebates paid by the seller to the buyer based on business performance are permitted because they benefit the borrower. Any rebate funds received must be applied directly to pay down the principal balance of the 7(a) loan that funded the acquisition, which does not trigger a subsidy recoupment fee.
- Working capital true-ups: Working capital adjustment provisions in the purchase and sale agreement are not classified as rebates, meaning any cash remitted to the borrower may be retained to support ongoing working capital rather than used to pay down the loan.
The source
What the SOP says
“Seller earnouts are prohibited; however, buyer rebates based on business performance are allowed because this is a benefit to the Borrower.
“If the Borrower receives funds based on a rebate from the seller, proceeds must be applied to pay down the principal balance of the 7(a) loan that funded the change of ownership. In accordance with 13 CFR § 120.223, SBA’s requirement to apply seller rebate payments to principal does not trigger a subsidy recoupment fee.
“Working capital adjustment provisions (e.g. working capital “true-up") contained in the Purchase and Sales Agreement are not a rebate to the Borrower as the funds remedy a lack of working capital at the time of the acquisition. As such, any cash remitted to the borrower may be retained to support the ongoing working capital needs of the business and is not required to pay down the change of ownership loan.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.