Earnouts, and why an SBA buyer can't offer one

The short version

• An earnout is part of the price paid later, only if the business hits agreed targets after the sale.
• Buyers use earnouts to bridge a gap between what you want and what they will pay.
• If your buyer uses an SBA loan, earnouts are not allowed.
• SBA rules allow a different tool, called a rebate. You receive the full price at closing, and agree to pay part of it back if the business falls short of agreed results. The money goes to pay down the buyer's loan.
• For buyers not using an SBA loan, earnouts are allowed, but they are hard to measure and often lead to disputes.

What an earnout is

An earnout ties part of the price to the business's results after closing. For example, a buyer might pay $800,000 at closing and up to $200,000 more over two years if revenue stays above an agreed level.

It lets a buyer pay more only if the business performs as you expect.

Why SBA buyers cannot offer one

For buyers using an SBA loan, rules effective October 1, 2026 (SOP 50 10 8.1) do not allow earnouts. The full price has to be set at closing.

Since many buyers of small businesses use SBA loans, plenty of owners will never see an earnout offer.

What SBA buyers can do instead: a rebate

Under the SBA rules, the price must be fixed at closing. Payments that go up if the business does well are not allowed. What is allowed works the other way: a rebate that goes down if the business does not.

How it works.

1. You and the buyer agree on the full price, paid at closing.
2. You agree on a target the business should hit after closing, such as a level of revenue or earnings over the first year or two.
3. If the business falls short of the target, you pay back an agreed amount. This is the rebate.
4. The rebate does not go to the buyer personally. It goes to the buyer's lender and pays down the SBA loan.

An example. The price is $1,000,000, paid at closing. You agree that if revenue in the first year after closing falls more than 10 percent below last year's, you will pay back up to $100,000. If revenue holds, you keep everything. If it falls short, your rebate reduces what the buyer owes the bank.

Why a buyer might want one. It protects them if something you expect to continue does not, such as a key customer or a contract renewal. It also shows the buyer you stand behind your numbers.

Why it can help you. It can close a gap between your price and the buyer's without lowering the price at closing. You receive the full amount the day the sale closes.

The risk to you. You may have to return money after the business is no longer yours to run. Some agreements set aside part of the price with a neutral third party, called an escrow, until the target period ends. That makes the rebate certain for the buyer and the lender. It also means you wait for that part of your money.

What to settle in writing.

• The target, and exactly how it is measured.
• The period it covers.
• The most you could have to pay back.
• Who calculates the result, and how disagreements are settled.
• Whether any money is held in escrow, and when it is released.

The buyer's lender must approve the terms. Lenders review this language before they approve the loan and again before closing, so raise it early.

Earnouts with other buyers

Buyers paying cash or using conventional loans can offer earnouts. They carry real risk for you:

• You no longer control the business. The buyer's decisions affect whether targets are met.
• Results are hard to measure fairly. Buyers can change costs, pricing or accounting in ways that affect the numbers.
• Disputes are common. Clear definitions help, but do not remove the risk.

If you accept an earnout, treat the earnout money as uncertain, and make sure the price paid at closing is one you could live with alone.