If a business is not eligible for the SBA loan through the government, the buyer can structure the deal in a few different ways.
1) Cash
Although it’s not common for a buyer to pay 100% cash for deals above $1M, they can obviously make an acquisition in all cash.
2) Seller Note
Seller financing or a seller note is a common way for a buyer to spread out the cash payments to the seller. The buyer may suggest a deal structure like the below example for a $2M deal:
$1.7M cash at closing, and $300k seller note paid quarterly over 2 years with interest of 7%.
This type of structure gives the seller more money in the long term when factoring in the interest rate, with the trade-off being less cash at the closing date.
3) Earnout
An earnout is another common structure for deals not eligible for SBA. An earnout ties part of the payment to a performance metric. It might be tied to a revenue benchmark, or a net profit benchmark. For example, a minority part of the overall deal may be contingent upon next year’s revenue hitting $5M. If the revenue goes over $5M, there can be a bonus for the seller. If it is under the $5M benchmark, the proportionate payout is made to the seller. So if revenue ended at $4.5M, then 90% of the earnout payment will be made ($4.5M divided by $5M is 90%).
These terms are all negotiable, of course. If you want to know more about deal structures, please feel free to contact us and we can assist.