SPONSORED CONTENT
Navigating PPP Loans in M&A Transactions with Rhoades McKee.
1. Does my PPP loan prohibit me from selling my business?
No, but there may be unintended consequences depending on the situation. A borrower should always review the terms of the promissory note they signed in connection with the PPP loan and contact their lender before proceeding with any sale transaction.
2. If I sell my business, will that jeopardize my PPP loan forgiveness?
This is the million dollar (or at least the value of your PPP loan) question. The SBA on October 2, 2020 issued a procedural notice which provides certain requirements upon a “change in ownership” (which includes a stock sale of at least 20% of the common stock of a PPP borrower or if the PPP borrower sells or otherwise transfers at least 50% of its assets). These requirements are transaction specific and should be confirmed with the lender on a case-by-case basis but will usually include lender consent, the submission of a completed forgiveness application prior to closing, and an escrow account controlled by the lender with funds in that account equal to the outstanding balance of the PPP loan.
However, a PPP borrower should also keep three important items in mind:
(A) If all of the PPP funds have not been spent by the borrower as of the date of the sale, that could create a forgiveness issue since the borrower will no longer be able to spend PPP funds on payroll costs, which must represent 60% of the PPP funds spent by borrower;
(B) The question of whether or not the borrower’s “covered period” has expired as of the date of the sale is critically important. If not, there could be a reduction in the forgiveness amount. For example, if a borrower elects to use the 24 week covered period, spends all of the PPP funds by week 16, and then closes on the transaction in week 20 prior to seeking loan forgiveness, then by the time the borrower does seek loan forgiveness by submitting an application, its full time equivalent (FTE) employees will be zero, which would result in a reduction in the forgivable amount of the PPP loan due to the borrower’s reduction in FTE’s; and
(C) The guidance provided by the SBA changes quickly and often. The SBA could issue future guidance that changes this answer.
3. If I am buying a business that obtained a PPP loan, where should I focus my attention?
From a buyer’s perspective it would be best to treat the PPP loan like any other debt that would be paid at closing. However, many sellers are unwilling to take this approach because, assuming a cash-free, debt-free transaction, they are essentially agreeing to pay for a loan using purchase price proceeds that could be mostly (if not fully) forgiven. If it is not possible to pay off the loan at closing due to seller’s unwillingness, then at a minimum, the purchase agreement should include a representation and warranty of the seller that states that the PPP application and certifications made to the lender were accurate (especially the necessity certification) and that all PPP funds were spent on qualified expenses permitted by the PPP program. The buyer should also request copies of the substantiating documents with respect to PPP funds. Finally, part of buyer’s due diligence activities should include a review of the borrower’s eligibility for the PPP loan, the loan application, and the use of PPP funds. The buyer’s risks in any transaction must be evaluated on a case by case basis depending on the structure of the transaction, the borrower’s existing credit facilities with its lender, and other relevant factors.
4. What else should I consider when negotiating a transaction when a PPP loan is involved?
Although every transaction is unique, there are a few items that should be considered up front. First, if there is a net working capital component to the transaction, should the PPP funds be considered in that calculation, or should the parties use a pre-COVID calculation? Second, if a seller insists on allowing the PPP loan to survive closing, what will the lender require given the specific facts of the transaction? There are other issues to consider, but these specific issues should be addressed as soon as possible.
Rhoades McKee Mergers and Acquisitions specialists assist buyers, sellers, shareholders, investors, lenders, and business brokers to identify and address the unique issues in a PPP loan specific to your transaction. For more information about the Rhoades McKee Mergers and Acquisitions team and subscribe to further updates, visit rhoadesmckee.com
