{"ok":true,"canonical_url":"https://dealroom.so/sba-7a/questions/how-must-an-earn-out-provision-be-structured-in-a-business-acquisition-to-be-compatible-wi","api_url":"https://dealroom.so/api/public/questions/how-must-an-earn-out-provision-be-structured-in-a-business-acquisition-to-be-compatible-wi","question":"How must an earn-out provision be structured in a business acquisition to be compatible with an SBA 7(a) loan?","topic":"Seller notes & standby","audience":"borrower","bot_mode":"buyer","short_answer":"An earn-out must be structured as a future payment from the business's cash flow, completely separate from the SBA loan proceeds, and fully subordinated to the SBA debt, not impacting the business's ability to repay the loan.","rule":"The SBA prohibits direct financing of earn-outs. Instead, these contingent payments to the seller must be funded by the business's post-acquisition profits, demonstrating that the business can service both its primary debt and the earn-out without jeopardizing the SBA loan.","example":"A $1.5 million acquisition includes a $150,000 earn-out over three years based on profit targets. The SBA loan covers the $1.5 million; the earn-out payments must explicitly come from the business's net profit after SBA loan payments, and be fully subordinated.","what_lenders_check":"Lenders carefully review earn-out clauses in purchase agreements to ensure they are structured as true contingent payments, not disguised debt that competes with the SBA loan. They confirm robust subordination language and assess the business's capacity to handle both obligations.","required_facts":["Earn-out structure","Future cash flow","Subordination","Contingent payment","SBA loan proceeds"],"source_families":["SOP 50 10 - Lender and Development Company Loan Programs","13 CFR Part 120 - Business Loans"],"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"}],"related_questions":[{"question":"If a seller takes a fully subordinated note, can they remain an employee or consultant after acquisition?","url":"https://dealroom.so/sba-7a/questions/if-a-seller-takes-a-fully-subordinated-note-can-they-remain-an-employee-or-consultant-afte"},{"question":"For a $900,000 business acquisition, what percentage of the total required equity injection can come from a fully subordinated seller note?","url":"https://dealroom.so/sba-7a/questions/for-a-900-000-business-acquisition-what-percentage-of-the-total-required-equity-injection-"},{"question":"Can a seller who takes a fully subordinated note also remain an employee or consultant of the business after the acquisition?","url":"https://dealroom.so/sba-7a/questions/can-a-seller-who-takes-a-fully-subordinated-note-also-remain-an-employee-or-consultant-of-"},{"question":"How does an earn-out provision affect an SBA 7(a) loan for a business acquisition?","url":"https://dealroom.so/sba-7a/questions/how-does-an-earn-out-provision-affect-an-sba-7-a-loan-for-a-business-acquisition"},{"question":"What is the minimum term duration a seller note must be on full standby for an SBA loan?","url":"https://dealroom.so/sba-7a/questions/what-is-the-minimum-term-duration-a-seller-note-must-be-on-full-standby-for-an-sba-loan"},{"question":"Can interest be accrued and paid on a seller note while it is on full standby?","url":"https://dealroom.so/sba-7a/questions/can-interest-be-accrued-and-paid-on-a-seller-note-while-it-is-on-full-standby"}],"related_terms":[{"term":"Lease with an option to purchase","url":"https://dealroom.so/glossary/lease-with-an-option-to-purchase"},{"term":"Business acquisition","url":"https://dealroom.so/glossary/business-acquisition"},{"term":"Default Provision","url":"https://dealroom.so/glossary/default-provision"},{"term":"Business acquisition loan","url":"https://dealroom.so/glossary/business-acquisition-loan"},{"term":"Cash-out","url":"https://dealroom.so/glossary/cash-out"},{"term":"Build-out","url":"https://dealroom.so/glossary/build-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":"2026-06-14","sba_rule_sources_checked_through":"2026-06-14"},"citation":{"label":"DealRoom.so SBA 7(a) Q&A","url":"https://dealroom.so/sba-7a/questions/how-must-an-earn-out-provision-be-structured-in-a-business-acquisition-to-be-compatible-wi","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."]}