Most sellers meet the earnout through a buyer's offer or a broker's suggestion, framed as the normal way to bridge a gap between your price and theirs. In mid-market M&A, it is. But most Main Street sales run through an SBA 7(a) loan, and the SBA's rules require a fixed, determinable purchase price at a single closing. An earnout is, by definition, a price that is not determined at closing. The current SBA rulebook, SOP 50 10 8, prohibits seller earnouts in 7(a) acquisitions outright.
What makes this worth a full guide is what happens next. There is a family of structures that accomplish much of what an earnout does and can survive SBA underwriting, and the line between the allowed and prohibited versions is precise enough to state in one sentence: the note's principal must be fixed at closing, and any contingency must be measured against what the business has already done, not what it might do. Sellers who understand that line negotiate these structures well. Sellers who do not either lose their financing or sign away more protection than they realize.
Credit where due: the clearest practitioner explanations of this distinction come from the attorneys at SMB Law Group, who handle hundreds of these transactions and publish generously on the mechanics. What follows is the seller's-eye view.
One note before the mechanics. This guide is education, not legal or tax advice. Every structure below has real drafting stakes, and the difference between an enforceable protection and an expensive mistake is a lawyer who does this daily. Bring one in before the LOI, not after.
Why buyers propose earnouts anyway
An earnout exists to solve three real problems, and the problems do not disappear just because the tool is banned.
The first is a valuation gap. You believe the business is worth 3.5x because the last eighteen months prove it. The buyer believes it is worth 3x because they cannot yet verify that the last eighteen months are the new normal. Someone has to carry the risk of that disagreement.
The second is information asymmetry. You know things about the business a buyer cannot fully check in diligence. Deferred, contingent payment is how buyers make sellers stand behind what they have said.
The third is transition risk. The buyer worries the business walks out the door with you. Contingent payment keeps you economically attached through the handoff.
A buyer who proposes an earnout on an SBA deal is not usually being tricky. They are usually reaching for the tool their reading tells them is standard, without knowing their own financing forbids it. Your job is to recognize the underlying concern and steer to a structure that closes, because the LOI that contains the word "earnout" gets flagged by the lender about three weeks into underwriting, and the restructuring happens then, under time pressure, with your business off the market. Better to have the conversation before anyone signs.
The line the SBA draws
Under SOP 50 10 8, effective June 2025, a 7(a) business acquisition requires a complete change of ownership at a fixed, documented price. Three consequences matter to a seller.
First, no earnouts. Any structure where you are paid more because the business performed well after closing is contingent price consideration, and it does not finance.
Second, a clean break. In a complete change of ownership you cannot remain an officer, director, stockholder, or employee after closing. The one sanctioned ongoing role is a consulting agreement, and the SOP caps it at twelve months from closing, extensions included.
Third, and this is the door left open: a seller note with a fixed principal amount is a normal, accepted part of SBA deal structure, and what the parties write inside that note about how it gets paid has room to move. Our guide on seller financing covers the baseline instrument, including the standby rules that govern when you can actually be paid. The structures below are variations written inside that instrument.
The structures that replace the earnout
Each of these is practice-based rather than SOP-endorsed, which means individual lenders accept or decline them case by case. Each maps to one of the three buyer concerns above.
The performance-based seller note: the upside case
The buyer issues a seller note with a fixed face amount, and the note's terms improve for you if the business performs: an interest rate that steps up if revenue or earnings exceed a benchmark, or payoff that accelerates on strong performance. The principal never changes; only the speed and cost of paying it do. This is the closest an SBA deal gets to giving a seller upside participation, and it is modest by design. If the buyer's concern is your confidence in growth, this is the structure that lets you express it without killing the financing.
The forgivable seller note: the downside case
This is the one you are most likely to see, and the one where the seller-side details matter most. The buyer issues a note for a fixed amount, typically the contested slice of the valuation, with a forgiveness provision: if the business's performance after closing falls below a benchmark, part or all of the principal is forgiven. Review dates commonly land at twelve and twenty-four months.
Here is the nuance that decides whether the structure is financeable, and it is the point worth engraving. The benchmark must be historical. It is set at what the business demonstrably did before closing, usually trailing-twelve-month revenue or earnings, taken from the same financials the lender underwrote. A note forgiven because the business fell below its own proven history is downside protection for the buyer, and lenders can get comfortable with it. A note that pays you more for beating history is an earnout wearing a costume, and it will be rejected. The trigger can only ever run one direction: the business doing worse than it did, never a requirement that it do better.
Understand what this means for you before you agree to one: a forgivable note is not deferred payment, it is at-risk payment, and the risk includes things the buyer controls. So the seller's defense is in the drafting. The benchmark should be set at or below verified historical numbers, never at an optimistic figure. Forgiveness should be tiered rather than cliff-edge, so a five percent miss does not erase the whole note. There should be a floor. The measurement method should be defined to the decimal, using consistent accounting, with your right to audit it. And the note should include ordinary-course protections, because a buyer who fires the sales team or drops your largest product line can drive the metric below the benchmark all by themselves.
Worked Example
Bridging a $300,000 gap without an earnout
A distribution business earns $450,000 in SDE. The seller prices it at $1.5 million; the buyer, leaning on a diligence report, offers $1.2 million. In a conventional deal this gap becomes an earnout. In this SBA deal it became three pieces.
| Fixed purchase price at closing | $1,275,000 |
| Forgivable seller note, 24-month review | $150,000 |
| Forgiveness benchmark (trailing 12-mo revenue at close) | $2.6M, tiered below 95% |
| Consulting agreement, 12 months of defined work | $75,000 |
| Seller's ceiling if the business holds its history | $1,500,000 |
| Seller's floor if revenue collapses below the tiers | $1,350,000 |
The loan documents show one fixed price. The seller reaches their number if the business keeps doing what it has already proven it can do, holds a defensible floor if it does not, and nothing in the structure requires the business to grow. Lender acceptance of terms like these varies; this one cleared underwriting because every contingency pointed at history.
The consulting agreement: the involvement case
If the buyer's real concern is transition, the sanctioned tool is a consulting agreement, capped at twelve months. It compensates you for actual work, on a defined scope, and it can carry a modest slice of value that would not fit in the price. The test a lender applies is blunt: are you being paid for services, or for the business's performance? A consulting fee contingent on revenue retention is an earnout in disguise and will be treated as one. Keep the two ideas in separate documents and separate logic.
Two more you may meet
A revenue stabilization provision pauses payments on your note, without forgiving anything, if trailing revenue drops below a threshold; you are still paid in full, later, and buyers accept a higher benchmark in exchange because the principal is never at stake. A performance escrow parks part of the price with a third-party agent, released to you against historical benchmarks. Both are rarer, both are lender-by-lender, and both follow the same one-sentence test.
How to negotiate when the earnout lands on the table
Treat the proposal as a diagnostic. Ask what the buyer is actually worried about, then match the tool: upside conviction gets a performance-based note, downside fear gets a forgivable note with your defenses drafted in, transition worry gets a twelve-month consulting agreement. Then get the buyer's lender to react to the structure before the LOI is signed, not after. Our guide on the letter of intent covers why terms that cannot finance should never survive into a signed LOI, and our guide on why deals fall through shows what happens when they do.
And hold one number in your head through all of it: every contingent dollar is a dollar you might not receive. A smaller fixed price that closes is routinely worth more than a larger theoretical ceiling attached to a structure the lender rejects or the business misses. Price contingent dollars like the at-risk dollars they are.
Common questions
A buyer put an earnout in their LOI and says their lender is fine with it. Should I believe them?
Ask for it in writing from the lender, and expect not to get it. The SOP's prohibition on seller earnouts in 7(a) acquisitions is explicit, and a loan officer's early enthusiasm is not underwriting. The practical move is to restructure before signing: same economics, expressed as a fixed price plus a note with contingent terms. If the buyer resists that translation, you have learned something useful about how well they understand their own financing.
Is a forgivable seller note good or bad for me as the seller?
It is a real concession, and sometimes a sensible one. You are converting certain money into at-risk money to defend your valuation. It tends to be worth it when the contested slice is modest, the benchmark is honest history rather than hope, the tiers and floor are drafted in your favor, and the buyer is strong enough that the business is unlikely to fall off a cliff. It tends to be a mistake when it papers over a large gap with a buyer you have doubts about. Our buyer vetting tool, Vet Your Buyer Before the LOI, is worth running before you agree to carry any of this risk.
Can the contingency be tied to the business growing after I leave?
Not in an SBA-financed deal. A trigger that pays you for growth beyond historical performance is exactly what the rules prohibit. The only financeable direction is downside relative to history: the note stands if the business holds what it already proved, and forgives if it falls below. If upside participation matters deeply to you, the honest conversations are a performance-based note's rate step-ups, which are modest, or a buyer using conventional financing, where true earnouts are legal and the rest of the capital stack gets more expensive.
What happens to these structures if the buyer sells the business two years later?
Whatever the documents say, which is why acceleration language matters. A well-drafted seller note, forgivable or otherwise, should accelerate on a sale, transfer, or refinancing of the business, so your remaining balance is paid at that closing rather than riding along with a new owner you never chose. Ask your attorney to include it; buyers rarely volunteer it.
Structure it before the LOI
Know what your deal can look like before you negotiate one.
BizTender runs SBA feasibility on your business up front, so you walk into offer conversations knowing what finances and what does not: the price a loan supports, the note structures that survive underwriting, and the terms that blow up in week three. The deal you sign is the deal that closes.