What to consider when buying and selling a business with a PPP loan

As business owners ponder their path forward during the economic crisis of 2020, and entertain thoughts of possibly selling, others are looking to reinvent and are seeking to take on new ventures. With any merger and acquisitions (M&A), especially during these uncertain times, due diligence is as critical as ever.

Specifically, the abundance of outstanding Paycheck Protection Program loans is cause for a thorough review by both the buyer and the seller throughout any M&A transaction. With so many PPP loans not yet forgiven, there’s significant likelihood that M&A transactions in the next year may involve PPP loans.

At the heart of any M&A, investors must know what they’re getting. And sellers want to profit, which relies on being attractive to prospective buyers. Strong due diligence aids both causes.

PPP primer

More than 4.8 million U.S. businesses have received loans through the Paycheck Protection Program (PPP), which was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). PPP loans have been a lifeline to many businesses, but also create complications for future M&A, investment, and financing transactions involving PPP borrowers.

Currently, there is no guidance describing when lenders may consent to a borrower engaging in a sale. There is also no guidance on whether a borrower can continue to participate in forgiveness after obtaining the lender’s consent and completing the sale.

The covered period for PPP loans is up to 24 weeks or December 31, 2020. Once a loan forgiveness application is filed—it’s expected that most banks will begin to accept these applications starting Aug. 10, 2020—it could be months more before a final loan forgiveness determination is made.

The process for review of a loan forgiveness application could take several months or longer, and as of now, there is no way to speed up the review of a loan forgiveness application. It is certain that there will be issues and subjects related to M&A transactions that are uncertain and vague.

The following are steps buyers should take when a M&A transaction includes a PPP loan.

Buyer considerations

  • A buyer of a company with a PPP Loan should expand their due diligence to include a close review of the PPP loan documents to confirm the change of control, assignment, and sale of asset provisions and prohibitions.
  • PPP loan documents typically require the lender’s (and perhaps the SBA’s) consent before executing a transaction involving a sale of the business or substantially all of its assets. If such consent is not obtained, loan forgiveness eligibility could be endangered. If that’s the case, the loan should be repaid at closing.
  • If not repaid, the transaction being executed could result in the default under the PPP loan. This could trigger default remedies for the lender, including default interest and immediate repayment.
  • Currently, there is no guidance describing when lenders may consent to a borrower engaging in a sale. There is also no guidance on whether a borrower can continue to participate in forgiveness after obtaining the lender’s consent and completing the sale.

Other considerations – for buyers and sellers/PPP borrowers

  • A PPP borrower who sells after receiving PPP loan proceeds will be more likely audited by the SBA for its application for, use and forgiveness of the PPP loan proceeds.
  • Because of a potential affiliation relationship created by an acquisition, affiliates of both seller and buyer may be pushed above the $2 million threshold for an SBA audit.
  • The SBA has strong audit and enforcement authorities that could result in loss of forgiveness eligibility and potential criminal and/or civil liabilities and penalties for the borrower/business owner.
  • These uncertainties combined with the risks of a loan not being forgiven clearly show the need for these items to be addressed in the M&A negotiations and documentation. Perhaps special representations and identity provisions should be added.
  • Buyers should closely examine the documentation used for PPP Loan application and determine if the loan met the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” requirement.
  • Buyers who have taken advantage of the Employee Retention Credit (ERC) should examine if the financial impact of the potential loss of the ERC that has then been or could have been, claimed by the buyer and its aggregated control group. This is especially important to private equity groups.
  • Parts of the deal that should be addressed include:
    • Indemnifications
    • Purchase price adjustments or use of escrow to be released when forgiveness is determined
    • Who applies for forgiveness?
    • Who defends a potential audit of forgiveness?
    • Use of unused PPP loan dollars
    • Who gets any tax benefits if the IRS reverses not allowing tax deductibility of expenses paid with PPP loan proceeds?
    • Representations and warranties clearly addressing PPP loan application and forgiveness application. If the buyer purchases a buy-side reps and warranty insurance policy, they should confirm coverage of the PPP loan in light of any COVID-19 related exclusions.

Additional Resources

If you would like to talk through the information above, or any areas where Rehmann can assist, please reach out to your Rehmann advisor. You may also contact us at info@rehmann.com.

Meet The Rehmann Team

Start typing a name ...
Searching for "{{nameQuery}}"...
Start typing an experience ...
Searching for "{{experienceQuery}}"...
Start typing a location ...
Searching for "{{locationQuery}}"...
Or view a list of team members

get rehmann expertise to drive your business in your inbox every week