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Glossary

What is Earnout?

Also called: earn-out, contingent consideration, performance-based purchase price

In one sentence: Part of a business's purchase price that the buyer pays the seller later, only if the business meets agreed performance targets after closing.

Last updated · Precise SBA editorial

In plain English

An earnout makes part of the price depend on the future. The buyer pays a fixed amount at closing, then more later if the business hits targets such as revenue, profit or client retention. It’s common in larger private deals and in some professional-practice sales.

Why SBA lenders treat it differently

A lender sizing a loan needs to know the price. A contingent payment to the seller makes the price uncertain and creates a future claim on the business’s cash. Under SOP 50 10 8.1, seller earnouts are prohibited in 7(a) change-of-ownership transactions, while buyer rebates based on performance are allowed, because they benefit the borrower; rebate money goes to pay down the SBA loan’s principal.

Hypothetical example

A seller wants $1,000,000 now plus up to $200,000 more if revenue grows. That’s an earnout, and it doesn’t fit an SBA-financed purchase.

An alternative: a fixed $1,100,000 price, with a clause that the seller refunds up to $100,000 if first-year revenue falls below an agreed level. If a refund is paid, the buyer applies it to the SBA loan’s principal. The seller gets more certainty; the buyer gets protection.

Common mix-ups

  • An earnout is not a seller note. A note is a fixed debt; an earnout is contingent.
  • A working capital true-up is not an earnout. It adjusts for what was delivered at closing, not future performance.
  • A consulting fee is not a way around it. A fee that’s really a contingent piece of the price is the kind of thing a lender will question.

What to do with it

Raise any contingent pricing before the letter of intent. See how retention pricing is restructured in buying an accounting firm, and how the seller’s role is handled in the seller transition period.

Common questions

Can I use an earnout with an SBA loan?

Not a seller earnout. The current SBA rulebook prohibits seller earnouts in a 7(a) change of ownership. A buyer rebate, where the seller refunds part of the price if performance falls short, is allowed.

What happens to a buyer rebate?

If the buyer receives money from the seller under a rebate, it must be applied to pay down the principal of the SBA loan that financed the purchase. A working capital true-up in the purchase agreement is treated differently and can be kept in the business.

Why do sellers ask for earnouts?

To bridge a gap between the price they want and the price the buyer will pay, usually because the seller expects growth the history doesn't yet show. Without an earnout, the gap has to be bridged another way: a lower price, more equity, a seller note or a rebate.

Related terms

Standby Seller NoteSeller financing in which the seller agrees not to be paid for a set period and ranks behind the bank loan, so it does not draw on the buyer’s cash flow.Seller Note (Seller Financing)A loan from the seller to the buyer for part of the purchase price, repaid over time under a written promissory note and usually subordinate to the bank loan.Change of OwnershipThe SBA term for a business purchase, including a partner buyout, which carries its own requirements on buyer cash, seller notes and cash-flow coverage.

Go deeper

Buying an Accounting Firm or CPA Practice with an SBA LoanAccounting practices are traditionally sold on retention-based terms: the seller is paid on the clients who stay. That custom collides with SBA rules on contingent payments, so the structure needs thought before the letter of intent.Can the Seller Stay On? The Transition Period in an SBA PurchaseMost buyers want the seller around for a while, and most sellers are willing. SBA rules set the shape of that arrangement, and they're stricter than many buyers and brokers assume.

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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.