Paycheck Protection Program Considerations During a Sale, Acquisition or Merger

This article was also featured on Connect Media’s Weekender on November 20, 2020.

Many small business owners took the federal government up on the lifeline known as the Paycheck Protection Program (PPP).  At its core, the PPP provided a means to keep employees at work and gave business owners breathing room as they navigated the uncertain economic landscape brought upon by the pandemic. The PPP was designed to be forgivable as long as the borrower qualified for the loan and proceeds were used for the intended purpose. As business owners look to the future and the next steps in the lifecycle of their company, some may consider selling their business or buying another company or its assets. The PPP has added a complexity to any Merger and Acquisition (M&A) activity as sellers and buyers consider how to handle a loan intended to be forgiven in the future.  Those active in the M&A market should be aware of the impact of the PPP and its influence on the terms and structure of the deal.  Here are a few things to consider:

Phases of the PPP Loan

The loan is designed to be utilized over an 8 week or 24 week period, both relatively short periods of time. Those engaging in M&A activities should consider the following phases of the lifecycle and adjust due diligence and risk accordingly.

• The spending phase – The company has made certifications in order to obtain the loan and should be accumulating information on how the proceeds are being put to use.
• The forgiveness application phase – Funds have been exhausted and the borrower has or will be completing a loan forgiveness application.
• The SBA determination phase – A borrower has submitted their application to the bank and is awaiting final determination from the SBA.

Determination of whether a loan is forgiven or would need to be repaid will impact the purchase price and could require an escrow of a particular amount until final determination is received. Buyers should also consider the ability of the SBA to audit a borrower for up to six years and not solely rely on forgiveness determination, as well as determine who is responsible for certifications to the SBA after the deal closes. A buyer will need to adjust due diligence procedures and determine acceptable risks depending on where the seller is in the lifecycle of the loan.

Deal Structure – Equity Transaction or Asset Purchase Transaction

An equity transaction requires a buyer to perform additional analysis on conclusions and certifications of a seller who secured a PPP loan.  In addition, a purchaser needs to consider any impact a pending deal would have on their own certifications made if they secured their own PPP loan. Certain areas that would require additional due diligence include loan eligibility rules, SBA affiliation rules and interpretation of the CARES Act including certain tax provisions like the Employee Retention Credit. An asset deal does not eliminate the complexity added by the PPP loan as the debt that typically would be repaid at closing was intended to be forgiven at a future date. Purchase prices considerations, additional escrow accounts and indemnification resulting from PPP activity will likely enter the deal landscape for the foreseeable future.

Additional Business Considerations

Many PPP loan agreements require the borrower to obtain consent from the lender and/or the SBA before entering into a transaction that would transfer assets or control the business entity.  While some M&A activities are straight forward, others are more complex in nature.  In addition, PPP borrowers are aware of the significant guidance issued after the loan was secured. The guidance often caused them to reconsider their specific situation in accordance with newly issued guidance and there is no indication that will stop.  Additional guidance, FAQ’s and IRS interpretations could impact deal economics.  Business owners should rely on their CPA to help them understand the financial risks a PPP loan introduces to a potential deal.  Similarly, qualified legal counsel can provide language that will help minimize current and future risk specific to PPP loan issues.  Involving your professional partners early on can help eliminate costly and potentially deal- ending conversations as both parties near the finish line.