# The seller wants a $150K earnout. SBA says earnouts are banned. Flip it. > Your seller wants an earnout, but SBA SOP 50 10 8.1 bans them in 7(a) acquisitions. Here's how to flip it into a buyer rebate SBA allows, with the math. By Jordan Menlo · Published October 26, 2026 Section: Business Funding › SBA & Government-Backed · Series: SBA 7(a) Playbook (https://mcafax.com/notebook/category/sba) Canonical: https://mcafax.com/notebook/sba-7a-earnout-buyer-rebate Source: MCAFax, The Broker's Notebook (https://mcafax.com/notebook). MCAFax is not a lender or a law firm. --- The lender struck one clause, and the whole deal wobbled. Rae (a made-up buyer) had shaken hands on Saltmarsh Bike Co. (a made-up repair shop) three weeks earlier. The seller wanted $750,000 at closing plus $150,000 more if year-one revenue cleared $1.1 million. Totally normal in a regular acquisition. In an SBA 7(a) deal, it's a dead clause. This is general information, not legal or financial advice. Confirm every rule with your lender and the current SOP before you sign a letter of intent. ## The one tip SBA SOP 50 10 8.1 (effective October 1, 2026), Appendix 15, says it flat out: seller earnouts are prohibited in 7(a) change-of-ownership deals. But the same sentence opens a door. Buyer rebates based on business performance are allowed, because they protect the borrower. So don't fight the lender. Flip the earnout into a rebate. An earnout says: "I pay you more if the business does well." A rebate says: "You pay me back if the business does worse than you promised." Same bet, opposite direction, and only one of them clears SBA. Here's what the SOP attaches to a rebate: - Any rebate cash the seller pays you must go toward principal on the 7(a) loan that funded the purchase. - Paying it to principal does not trigger SBA's subsidy recoupment (prepayment) fee. - A working capital true-up in the purchase agreement is not a rebate. That cash fixes a working capital shortfall at closing, so you can keep it in the business. ## Worked example Flipped deal: price $900,000, all at closing. If year-one revenue comes in under $1.1 million, the seller pays Rae back $150,000. Rae adds $60,000 of working capital, so total project cost is $960,000. An Initial Acquisition needs at least a 10% equity injection on total project cost, and SBA says that can't be reduced. That's $96,000 from Rae. The 7(a) loan is $864,000. Assume 10.5% over 10 years (an assumption, not a quote). The payment is about $11,658 a month, or $139,901 a year. Initial Acquisitions need debt service coverage of at least 1.25 to 1, so the shop needs about $174,876 of cash flow for debt service. Saltmarsh showed $210,000 last year, which is roughly 1.50x. It works. Now year one lands at $1.02 million. The seller owes the $150,000 rebate, and all of it goes to principal: - The balance after 12 payments is about $812,382. - After the rebate, it drops to about $662,382. - At the same $11,658 payment, the loan is paid off in about 79 more months instead of 108. That's roughly two and a half years early, with no SBA prepayment fee. - If the lender agrees to re-amortize instead (their call, not an SBA rule), the payment drops to about $9,506. One catch. The business valuation the lender orders still has to support the full $900,000. If the valuation comes in lower, the gap has to be your equity. ## Do this week - Search your letter of intent for "earnout," "contingent payment," and "deferred consideration." Flag every one. - Rewrite each as a buyer rebate: same revenue target, with the seller paying you if the business misses it. - Have your deal attorney add language that rebate cash goes to 7(a) principal. - Keep any working capital true-up in its own clause so nobody confuses it with a rebate. - Check the seller's role too. Under Appendix 15, the seller in an Initial Acquisition can't stay on as an employee or owner, but you can hire them as a consultant for up to 24 months total. - Send the revised LOI to your lender before you pay for the valuation. Same bet. Opposite direction. Only one of them gets funded. ## Sources - SBA SOP 50 10 8.1, Appendix 15 (7(a) Changes of Ownership: earnouts and buyer rebates, working capital true-ups, seller transition and consultant limit, business valuation, equity injection and DSC for Initial Acquisitions): [SBA's SOP 50 10 page](https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs) - SBA 7(a) loan types overview: [SBA's 7(a) loans page](https://www.sba.gov/funding-programs/loans/7a-loans) - More in the series: [SBA 7(a) Playbook](https://mcafax.com/notebook/category/sba) Verified against SOP 50 10 8.1 text: October 26, 2026. ## Questions readers ask **Can an SBA 7(a) loan finance a business purchase with an earnout?** No. SOP 50 10 8.1, Appendix 15, prohibits seller earnouts in 7(a) change-of-ownership transactions. Buyer rebates tied to business performance are allowed. **What happens to a seller rebate after closing?** Under SOP 50 10 8.1, rebate funds must be applied to the principal balance of the 7(a) loan that funded the purchase, and that payment does not trigger a subsidy recoupment fee.