One buyer I followed put roughly $2M in forgivable seller notes on top of $6M in guaranteed financing, on an electrical contractor deal announced at $8M total. The seller's best year was $1.75M in SDE. The two years before that, he was stuck around $1M. No lender was going to underwrite $1.75M as the new baseline off one good year, so the extra $2M got parked in a note that might never get paid.
That's the whole mechanic in one sentence. A forgivable note is a bet the seller makes on his own numbers, with the buyer holding the dice.
Most guides stop there. They'll tell you a forgivable note bridges a valuation gap and move on to the next slide. I spend a lot of time in the searcher communities where these deals get posted after they close, and the part that actually matters is the trigger design: the mechanism that decides whether the seller gets paid or the buyer gets forgiven. That's the part I almost never see written down anywhere.
Standby periods and plain (non-forgivable) seller notes are their own topic. This one's specifically about how buyers pick the trigger.
The trigger catalog
Every forgivable note I've come across ties to one of a handful of measurements. Every one of them is really just a different way of asking whether the business performed.
- Annual SDE sliding scale. The electrical contractor deal above eventually got refined into a year-by-year table: roughly $700K "at risk" per year for 3 years, with forgiveness stepping up as SDE steps down. Hit the target SDE and nothing forgives. Miss it badly and most or all of that year's tranche gets forgiven. Whatever's left unforgiven after year 3 converts into an ordinary payable note.
- Revenue retention. Some notes forgive in pieces as long as the top line holds over a set standby, commonly 24 months. Simple test: did revenue stay where it was.
- Gross profit vs. the trailing 3-year average. One home automation deal I followed had a note with no payments in years 1 and 2, forgivable if gross profit fell below the seller's own 3-year trailing average. That ties his forgiveness to the same numbers he already reported as the business's baseline.
- SDE margin holding at 20% or above. A buyer I watched structure a transportation services deal split the forgivable piece into two notes, about $175K and $50K, both tied to the same margin test: stay at or above 20% SDE margin or the note forgives.
- Matching a specific prior year's revenue, twice. A franchise resale I followed had half the seller note forgivable if the buyer matched a prior year's revenue in each of the following 2 years. The bar was matching that number, twice in a row, nothing fancier.
- Net churn. On recurring-revenue businesses I've seen forgiveness tracked against net churn instead of raw revenue, which makes more sense when the real risk is losing existing customers rather than failing to add new ones.
Sliding scale beats a cliff, and simple beats clever
You can build these two ways. A sliding scale, where partial amounts forgive at different performance levels (the $700K-a-year table is the cleanest version of this I've seen). Or a cliff, where you either hit the number and nothing forgives, or you miss it and the whole tranche does.
I'd lean toward a sliding scale if you have room to negotiate one. It's fairer to both sides, and it's less likely to blow up the relationship over a single soft quarter.
But I've watched buyers get pushed toward cliff structures because lenders don't love underwriting complexity. More moving parts in the forgiveness formula means more DSCR scenarios your lender has to stress-test, and more chances someone on a credit committee decides the whole thing is more trouble than it's worth.
Measurement windows mostly cluster in the 12 to 24 month range in what I've seen. I've also come across a full 3-year standby and even a 10-year standby on a smaller tranche. A longer standby just buys the buyer more time to actually prove or disprove the SDE the trigger is measuring.
The sophisticated use case
The clearest explanation I've seen for why buyers reach for this tool came from someone working through a transportation services deal. His lender's view of SDE and his own view of SDE didn't line up. Instead of arguing about whose number was right, he and the seller used a forgivable note to bridge that exact gap: the SBA loan gets sized off the lender's conservative figure, and the forgivable note absorbs the difference between that and what the buyer actually believes the business is worth.
I think that's the real use case, more than wanting a bigger headline price. It lets both sides skip the argument over whose SDE number is right.
Get the formula wrong at LOI, fix it at purchase agreement
I've watched more than one buyer admit, in public, that they wrote the exact forgiveness formula into the LOI before thinking it all the way through. One buyer on the $8M electrical deal said as much: he didn't think his forgivable structure would clear the SBA's rules once they actually reviewed it, and he was quietly reworking the mechanics before it went into the purchase agreement.
His reasoning for not fixing it sooner was blunt. The seller was already lukewarm, and reopening the number in the middle of the LOI felt like the fastest way to lose him for good.
I've seen that pattern often enough now to trust it. Keep the LOI simple (forgivable amount, rough trigger, standby length) and save the actual formula, the year-by-year tranches, the exact SDE thresholds, for the purchase agreement, once the seller is committed and your attorney and lender are both in the room.
The SBA reality (and it moves)
The SBA has rules about which forgiveness structures it'll actually approve, and those rules changed at some point in 2026. I watched one buyer, mid-negotiation on a deal with a meaningful forgivable tranche, say flatly that his structure had zero chance of getting approved after the change took effect.
I'm hedging hard here because I've only got that one account and haven't verified the rule text myself. If you're structuring one of these, check with your SBA lender before you finalize anything. The goalposts on this specific mechanic move more than most.
Offsets are a different tool
Worth separating out: when a seller fails to hold up a transition obligation (staying on to train staff, introducing key accounts, whatever got promised in the purchase agreement), buyers usually handle that through an offset right, netting the shortfall against whatever's still owed on the seller note. That's a distinct clause from the forgiveness trigger, even though both live on the same note.
The forgiveness trigger tracks whether the business performed. The offset right tracks whether the seller kept his word.
I'd treat these as two separate tools in the same deal. Trying to make one note do both jobs just adds complexity your attorney and lender end up untangling later.