How to Structure a Contingent Promissory Note in SBA Acquisitions

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: (00:00:00) - Intro (00:02:16) - Closed deals update and firm statistics (00:05:40) - Why deals die and financial diligence (00:08:30) - What is a contingent promissory note (00:09:44) - Contingent note vs traditional earn-out (00:12:30) - SBA rules and purchase price requirements (00:14:15) - Choosing metrics for contingent notes (00:21:20) - Measurement mechanisms and timeframes (00:24:11) - Seller incentives and margin protection (00:28:50) - Post-closing covenants and business operations (00:32:00) - Tax consequences of debt forgiveness (00:36:20) - 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/ [https://smblaw.group/] Connect: Eric Pacifici — https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin Henderson — https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam Rosati — https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

SMB Law Group - Building for the Acquisition Entrepreneur

Sam Rosati and David Brackett explore the business of building SMB Law Group, a firm designed specifically for acquisition entrepreneurs. Brackett, the firm's COO, joined roughly six months after launch when the three founding attorneys needed help scaling beyond a glorified solo practice. Today, the firm employs 28 people and has earned recognition from Financial Times and law.com for innovation in the legal market. They discuss: - How the firm's labor model and service offerings have evolved to serve deals ranging from sub-$1.5 million Main Street acquisitions to larger independent sponsor transactions - The intentional fee structures that place the firm at risk alongside clients, avoiding the $250,000 bills common at traditional firms - Why operating as a fully remote, distributed team requires stronger systems, more deliberate management, and hiring for attributes like hunger, curiosity, and diligence - The difference between a lifestyle firm and a flexible firm that still demands excellent work and client service This episode offers rare transparency into how a professional services firm navigates growth, manages remote teams, and builds around a specific client profile without traditional office infrastructure or debt obligations. ______________________________________________________ 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/ [https://smblaw.group/] Connect: Eric Pacifici — https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin Henderson — https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam Rosati — https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

How to Reduce Risk in Closing Your Deal | The LOI

Sam Rosati and Kevin Henderson explore the legal work stream in small business acquisitions and how buyers can reduce deal risk from letter of intent through closing. The conversation addresses why so many deals fall apart after LOI despite strong financials, focusing on the specific legal provisions and negotiation tactics that either protect or jeopardize a transaction. Henderson emphasizes that friction, not just time, kills deals, and that clarity on contentious terms early in the process significantly improves closing rates. They discuss: - Why working capital, indemnification caps, and seller note terms must be addressed in the LOI, not deferred to later negotiation - How information asymmetry and broker incentives can push buyers to leave critical terms vague, creating costly problems post-LOI - The binding power of exclusivity provisions and why most reimbursement clauses are difficult to enforce in practice - Tactical approaches to document negotiation, including the value of issues lists and direct seller-buyer conversations outside of legal markups This episode on Main Street Deals offers practical guidance for searchers and small business buyers navigating the legal complexities of acquisitions without unnecessary costs or deal-breaking surprises. 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/ [https://smblaw.group/] Connect: Eric Pacifici — https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin Henderson — https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam Rosati — https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

What Really Happens Before Closing | Main Street Deals Podcast

Sam Rosati and Eric Pacifici examine the critical period between signing a letter of intent and closing a small business acquisition on Main Street Deals. Drawing from their firm's 387 closed transactions, they reveal that roughly 68% of deals under LOI actually reach closing — a reality that contradicts the false confidence many first-time buyers feel after signing. They discuss: - Why quality of earnings is the single biggest deal killer, responsible for 40% of failed transactions - How debt service coverage ratio requirements can derail lending even when banks like the business and the buyer - The working capital trap that surfaces post-LOI when buyers realize the business needs significantly more liquidity than expected - Statistical likelihood of closing at each milestone: LOI, bank term sheet, quality of earnings completion, and signed purchase agreement - The psychological shift that causes buyers to become over-invested emotionally while sellers retain more leverage than expected This episode provides essential risk awareness for anyone navigating their first Main Street acquisition, explaining why the signed LOI marks the beginning of the race rather than the finish line. (00:00:00) - Intro (00:03:15) - The LOI is just the beginning (00:03:58) - Psychology and leverage after signing (00:06:57) - Statistical thresholds from LOI to close (00:09:29) - Quality of earnings as deal killer (00:11:10) - Signed purchase agreement odds (00:13:33) - War stories and warning signs (00:14:17) - Business dependency red flags (00:17:15) - Retrades versus renegotiations (00:22:03) - Bank underwriting hurdles (00:22:53) - DSCR and lending thresholds (00:34:20) - Working capital as a deal killer (00:35:29) - Why working capital kills deals (00:41:06) - Closing thoughts SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/]

M&A Deal Terms Special Report: Lower Middle-Market Deals Insights

Sam Rosati and Eric Pacifici break down the 2025 SRS Acquiom Lower Middle Market Research Report, examining transaction terms for deals under $50 million. The conversation focuses on how purchase agreement structures and legal terms affect risk allocation between buyers and sellers. Eric and Sam explain why understanding indemnification caps, escrows, and earn-outs matters just as much as negotiating price, particularly for self-funded searchers competing against strategic buyers and private equity funds. They discuss: - Why strategic buyers now represent 55% of lower middle market acquisitions and how they can outbid individual buyers - How rising debt costs combined with elevated valuations have increased equity requirements and the use of earn-outs - Why 100% of lower middle market deals include escrows or holdbacks, typically around 10% of purchase price - When deal terms can deviate significantly from market standards depending on counterparty sophistication - Why rep and warranty insurance remains uncommon in deals under $25 million due to cost and documentation requirements This episode from Main Street Deals gives buyers and sellers practical benchmarks for negotiating M&A agreements in the small to lower middle market space. Read the full report here - https://www.srsacquiom.com/our-insights/lower-middle-market-deals/ [https://www.srsacquiom.com/our-insights/lower-middle-market-deals/] Links: SMB Law Group - https://smblaw.group/ [https://smblaw.group/] Eric on LinkedIn - https://www.linkedin.com/in/eric-b-pacifici/ [https://www.linkedin.com/in/eric-b-pacifici/] Kevin on LinkedIn - https://www.linkedin.com/in/khendersonco/ [https://www.linkedin.com/in/khendersonco/] Sam on LinkedIn - https://www.linkedin.com/in/sam-rosati-68787a8/ [https://www.linkedin.com/in/sam-rosati-68787a8/] Topics: (00:00:00) - Intro (00:00:43) - Emergency episode on 2025 deal point study (00:01:37) - What is a deal point study (00:03:42) - Strategic buyers dominating lower middle market (00:05:26) - Rising equity requirements in deals (00:07:03) - Earn-outs on the rise (00:08:46) - Escrows and holdbacks are universal (00:11:22) - How market terms vary in practice (00:14:00) - Rep and warranty insurance trends (00:15:31) - Terms matter as much as price (00:17:05) - Closing thoughts and resources