What is an earnout, and why can't you use one with an SBA loan?
An earnout is part of the price paid later, only if the business hits agreed numbers. It is the standard way to bridge a gap between what a seller wants and what a buyer will risk — and it is exactly what SBA rules do not allow in a change of ownership.
What it solves
The seller says the business is growing and prices it accordingly. You see three years of flat revenue and one good quarter. An earnout settles the argument with evidence instead of adjectives: pay the base price now, pay the rest if the growth is real.
The SBA problem
If you are financing with an SBA 7(a) loan — which most first-time buyers are — a contingent, performance-based payment to the seller is not permitted in a change of ownership under SOP 50 10 8. A price rebate mechanism, where the price falls if performance disappoints, is treated differently. The practical effect is the same negotiation with the arithmetic reversed, and it has to be structured before the loan file is assembled, not after.
What buyers use instead
- A seller note with a right of offset. If the promised customers or margins do not appear, the balance owed goes down. Same protection, structure your lender recognises.
- A lower price with an upside for the seller elsewhere — a consulting arrangement inside the twelve-month limit, or a rebate clause.
- Nothing at all. If the growth story is the only thing holding the price up, the honest move is often to price the business as it is.
If you do use one (unfinanced deals)
Every earnout dispute comes from the same four places, so settle them in writing:
| The metric | Revenue is hard to argue about; EBITDA invites an argument about every expense you add after closing |
|---|---|
| Who controls it | You will run the business. The seller will claim your decisions cost them the target |
| How it is measured | Which accounting basis, prepared by whom, and who gets to inspect the workings |
| What happens if you sell | A resale during the earnout period without a clause is a lawsuit waiting to be filed |
An earnout is a bet that the seller's story is true, settled later. A pre-screen is the cheaper version of the same question, settled now.
Questions buyers ask
Are earnouts allowed on SBA-financed acquisitions?
No. Contingent, performance-based payments to the seller are not permitted in an SBA change-of-ownership transaction under SOP 50 10 8. A rebate structure, where the price is reduced if performance falls short, is treated differently — and a seller note with a right of offset achieves much of the same protection.
What is the safest earnout metric?
Revenue, or another figure the buyer cannot influence by changing how the business is run. EBITDA-based earnouts turn every post-closing decision — a new hire, a marketing spend, an owner's salary — into an argument about whether the seller's target was missed unfairly.
Sources
Related
- Letter of Intent (LOI) — A letter of intent sets out the deal you and the seller believe you have agreed: price, structure, what is included, and how long you get to verify it.
- SBA 7(a) loan (business acquisition) — The SBA 7(a) programme is how most first-time buyers finance a Main Street purchase.
- Seller note (seller financing) — A seller note is the portion of the purchase price the seller agrees to be paid later, with interest.
Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →
Last updated: 2026-08-22