{"ok":true,"canonical_url":"https://dealroom.so/for-lenders/questions/how-does-the-sba-treat-an-earn-out-provision-in-a-business-acquisition-for-determining-the","api_url":"https://dealroom.so/api/public/questions/how-does-the-sba-treat-an-earn-out-provision-in-a-business-acquisition-for-determining-the","question":"How does the SBA treat an earn-out provision in a business acquisition for determining the loan amount and equity injection?","topic":"Change-of-ownership underwriting","audience":"lender","bot_mode":"lender","short_answer":"An earn-out provision in a business acquisition cannot be financed by the 7(a) loan and is typically treated as a contingent liability that must be subordinated to the SBA loan.","rule":"SBA 7(a) loan proceeds cannot be used to fund an earn-out. An earn-out, being a future payment contingent on the business's performance, is generally considered a seller's equity and must be fully subordinated to the SBA loan. The earn-out amount is not included in the calculation of the required buyer equity injection.","example":"A business is acquired for $1,000,000, with an additional $200,000 earn-out payable over two years if specific revenue targets are met. The 7(a) loan is for the $1,000,000 purchase price. The $200,000 earn-out cannot be financed by the SBA loan and must be fully subordinated to the SBA loan and not paid until the SBA loan is satisfied.","what_lenders_check":"Lenders must ensure that earn-out provisions are properly structured, not financed by the SBA loan, and fully subordinated. Failure to do so can create an undisclosed liability that impairs the business's ability to repay the SBA loan, leading to a guaranty repair.","required_facts":["Earn-out provision","Business acquisition","Not SBA financeable","Subordinated debt","Contingent liability"],"source_families":["SOP 50 10 - Lender and Development Company Loan Programs","13 CFR Part 120 - Business Loans","7(a) Loan Program Terms, Conditions, and Eligibility"],"official_sources":[{"title":"SOP 50 10 - Lender and Development Company Loan Programs","url":"https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx"},{"title":"13 CFR Part 120 - Business Loans","url":"https://www.ecfr.gov/current/title-13/chapter-I/part-120"},{"title":"7(a) Loan Program Terms, Conditions, and Eligibility","url":"https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility"}],"related_questions":[{"question":"How does a lender evaluate the reasonableness of a business purchase price when the seller note is fully subordinated?","url":"https://dealroom.so/for-lenders/questions/how-does-a-lender-evaluate-the-reasonableness-of-a-business-purchase-price-when-the-seller"},{"question":"What are the specific requirements for valuing inventory and equipment in a business acquisition for a 7(a) loan?","url":"https://dealroom.so/for-lenders/questions/what-are-the-specific-requirements-for-valuing-inventory-and-equipment-in-a-business-acqui"},{"question":"When is an independent business appraisal mandatory for a 7(a) loan financing a business acquisition with a purchase price over $500,000?","url":"https://dealroom.so/for-lenders/questions/when-is-an-independent-business-appraisal-mandatory-for-a-7-a-loan-financing-a-business-ac"},{"question":"How does the SBA view a change of ownership where the new owner has no prior industry experience?","url":"https://dealroom.so/for-lenders/questions/how-does-the-sba-view-a-change-of-ownership-where-the-new-owner-has-no-prior-industry-expe"},{"question":"Is an independent business appraisal required for a 7(a) loan financing a business acquisition with a purchase price exactly $500,000?","url":"https://dealroom.so/for-lenders/questions/is-an-independent-business-appraisal-required-for-a-7-a-loan-financing-a-business-acquisit"},{"question":"When must a lender require an independent business valuation for a change of ownership 7(a) loan, and what are the specific thresholds?","url":"https://dealroom.so/for-lenders/questions/when-must-a-lender-require-an-independent-business-valuation-for-a-change-of-ownership-7-a"}],"related_terms":[{"term":"Business acquisition","url":"https://dealroom.so/glossary/business-acquisition"},{"term":"Default Provision","url":"https://dealroom.so/glossary/default-provision"},{"term":"For-profit business","url":"https://dealroom.so/glossary/for-profit-business"},{"term":"Business acquisition loan","url":"https://dealroom.so/glossary/business-acquisition-loan"},{"term":"Alienate the Business","url":"https://dealroom.so/glossary/alienate-the-business"},{"term":"Cash-out","url":"https://dealroom.so/glossary/cash-out"}],"related_tools":[{"name":"SBA 7(a) payment & fee calculator","url":"https://dealroom.so/sba-7a/calculator"},{"name":"Find an active SBA 7(a) lender","url":"https://dealroom.so/lenders"}],"data_freshness":{"last_reviewed":"2026-06-13","sba_rule_sources_checked_through":"2026-06-13"},"citation":{"label":"DealRoom.so SBA 7(a) Q&A","url":"https://dealroom.so/for-lenders/questions/how-does-the-sba-treat-an-earn-out-provision-in-a-business-acquisition-for-determining-the","source_type":"DealRoom Q&A"},"caveats":["Grounded in the current SBA rulebook; verify against official sources before relying on it for a live deal.","Not legal, tax, or financial advice and not an approval decision."]}