How to Structure a Contingent Promissory Note in SBA Acquisitions

Eric Pacifici and Kevin Henderson explore one of the most powerful tools in SBA M&A: the contingent promissory note. This structure allows buyers to bridge valuation gaps when a seller's asking price exceeds what historical earnings can support through traditional financing. The conversation covers how contingent notes differ from earn-outs, why SBA regulations require purchase prices that can decrease but never increase, and how to structure these arrangements to minimize disputes. They discuss: Why revenue metrics are more objective than EBITDA or customer retention measures How sellers remaining post-closing can manipulate performance metrics to trigger payouts The critical difference between debt forgiveness and contingent purchase price for tax purposes Why dispute resolution mechanisms should involve independent accountants rather than litigation How to establish clear measurement periods and financial accounting methodologies This episode provides essential guidance for self-funded searchers and lower middle market buyers navigating valuation disagreements while maintaining deal momentum and protecting both parties' interests. Topics: 00:00 - Intro 02:16 - Closed deals update and firm statistics 05:40 - Why deals die and financial diligence 08:30 - What is a contingent promissory note 09:44 - Contingent note vs traditional earn-out 12:30 - SBA rules and purchase price requirements 14:15 - Choosing metrics for contingent notes 21:20 - Measurement mechanisms and timeframes 24:11 - Seller incentives and margin protection 28:50 - Post-closing covenants and business operations 32:00 - Tax consequences of debt forgiveness 36:20 - Handling disputes on contingent notes ______________________________________________________ SMB Law Group combines decades of experience with a modern approach to help small and medium business buyers, sellers, and searchers reach their legal and deal goals. Learn more: https://smblaw.group/ Connect: Eric Pacifici —   / eric-b-pacifici   Kevin Henderson —   / khendersonco   Sam Rosati —   / sam-rosati-68787a8