{"id":1453,"date":"2020-08-06T20:28:20","date_gmt":"2020-08-06T20:28:20","guid":{"rendered":"https:\/\/www.bfvlaw.com\/buying-or-selling-a-business-with-a-ppp-loan-consider-this\/"},"modified":"2022-11-22T16:34:32","modified_gmt":"2022-11-22T16:34:32","slug":"buying-or-selling-a-business-with-a-ppp-loan-consider-this","status":"publish","type":"post","link":"https:\/\/www.bfvlaw.com\/buying-or-selling-a-business-with-a-ppp-loan-consider-this\/","title":{"rendered":"Buying or Selling a Business with a PPP Loan? Consider This\u2026"},"content":{"rendered":"\r\n

Despite a world filled with uncertainty, businesses continue to be bought and sold. Indeed, many institutional buyers barely hiccupped before marching on. Although it may look like business as usual in most respects, at least one new creature begat by the coronavirus must be reckoned with by buyers and sellers: the Paycheck Protection Program<\/a> (PPP) loan.<\/p>\r\n\r\n\r\n\r\n

Before negotiating for the purchase or sale of a business, the overall consequence of an existing or potential PPP loan must be assessed. Below are four ways in which a PPP loan may affect a transaction.<\/p>\r\n\r\n\r\n\r\n

#1 Eligibility to Obtain a PPP Loan<\/strong>
If a business or business owner has applied for or is considering applying for a PPP loan while also negotiating or contemplating a sale of that business, that business\u2019s eligibility to obtain a PPP loan may be jeopardized.<\/p>\r\n\r\n\r\n\r\n

When reviewing eligibility, the Small Business Administration<\/a> (SBA) will analyze the business on the date of the application, in association with all of the business\u2019s \u201caffiliates.\u201d Even prior to the closing of a sale transaction, a prospective buyer of a business may be considered that business\u2019s \u201caffiliate\u201d for SBA purposes under the SBA\u2019s \u201cpresent effect\u201d rule, which gives present effect to the transactions contemplated in any \u201cagreement in principle.\u201d Negotiated but unexecuted purchase agreements may qualify as \u201cagreements in principle\u201d, and the SBA has asserted that even letters of intent may indicate there is an \u201cagreement in principle.\u201d<\/p>\r\n\r\n\r\n\r\n

The SBA has also recently provided some additional guidance that in certifying a need for PPP funding, both public and private businesses must take into account their ability to \u201caccess other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to their business.\u201d The type of buyer and their goals for the operation of the business may affect a business\u2019s ability to truthfully make the certification.\u00a0<\/p>\r\n\r\n\r\n\r\n

#2 Eligibility to Obtain Forgiveness <\/strong>\u00a0
Consent: <\/em>The form SBA promissory note provided for use with PPP loans provides that a borrower will be in default in the event it \u201creorganizes, merges, consolidates or otherwise changes ownership or business structure without [the PPP lender\u2019s] prior written consent.\u201d<\/p>\r\n\r\n\r\n\r\n

Note: not all PPP lenders use the SBA forms, but it is reasonable to suspect that they may contain similar default provisions. SBA guidelines have provided that any change in ownership within the first 12 months after disbursement of a PPP loan also requires SBA consent.<\/p>\r\n\r\n\r\n\r\n

Given the newness of this program and the amount of applications for loans and PPP loan forgiveness circulating, obtaining the consent of both the SBA and the PPP lender may take a prohibitively long time (and may not ever be obtained given the circumstances). Parties should be aware that insisting on consent may scuttle the deal. On the flip side, moving forward without the consent may very likely jeopardize the eligibility to obtain loan forgiveness.<\/p>\r\n\r\n\r\n\r\n

Sale structure<\/em>: If a business is in the PPP\u2019s 24-week period during which it must meet certain operational standards to qualify for forgiveness, an intervening asset sale will likely preclude forgiveness itself (regardless of the issue of consent). Under an asset sale, the selling company will (almost certainly) not have any qualifying employees or expenses after the sale and will fail to meet the SBA requirements. If the sale is structured as a stock sale, to remain eligible the employees should likely remain employed by the target company and the target company should continue to use PPP loan proceeds for qualifying expenses.<\/p>\r\n\r\n\r\n\r\n

#3 Eligibility to Obtain Employee Retention Credit<\/strong>
Buyers should be aware that affiliates of a PPP borrower (which would include the buyer of a business who at any time obtained a PPP loan) will almost certainly not be allowed to take advantage of the Employee Retention Credit enacted as part of the CARES Act.<\/p>\r\n\r\n\r\n\r\n

\u00a0#4 Dealing with an Outstanding PPP Loan<\/strong>
Unsurprisingly, given the uncertainty of forgiveness, many buyers will want any PPP loan to be paid off from the proceeds at closing, as a part of its purchase of a business free and clear of any and all debt and encumbrances. Some institutional buyers have taken a hard line on this for reputational purposes and will not allow any business to become a part of their portfolio with PPP loans outstanding.<\/p>\r\n\r\n\r\n\r\n

To the extent buyers allow for a PPP loan to remain in place and depending on how the outstanding loan is treated in the final sale documents, a buyer may also insist on being indemnified to the extent forgiveness is not obtained and against penalties that may be incurred in connection with the PPP loan.<\/p>\r\n\r\n\r\n\r\n

On the flip side, since the forgiveness feature of PPP loans makes it unlike many other debts, most sellers will want the buyer to bear the risk, maintain eligibility and apply for forgiveness, but often are willing to accept credit\/payment (whether through post-closing adjustment or disbursement from escrowed funds) for the amount of any forgiveness actually obtained.<\/p>\r\n\r\n\r\n\r\n

There are a number of ways such a payment or credit can be structured in a final deal. If the loan will remain outstanding after closing and future payments or credit to the seller are conditioned on forgiveness, the seller should negotiate covenants that obligate the buyer to undertake certain practices to maintain forgiveness eligibility, with indemnification to the extent forgiveness is lost due to a buyer action.<\/p>\r\n\r\n\r\n\r\n

Please keep these few things in mind if you are contemplating the purchase or sale of a business. As always, specific individual circumstances may call for additional scrutiny into any of the foregoing or carry additional considerations not mentioned here.<\/p>\r\n\r\n\r\n\r\n

If you are contemplating a purchase or sale and need assistance walking through anything mentioned in this article, please reach out to me<\/a> directly.<\/p>\r\n","protected":false},"excerpt":{"rendered":"

Despite a world filled with uncertainty, businesses continue to be bought and sold. Indeed, many institutional buyers barely hiccupped before marching on. Although it may look like business as usual in most respects, at least one new creature begat by the coronavirus must be reckoned with by buyers and sellers: the Paycheck Protection Program (PPP) […]<\/p>\n","protected":false},"author":5,"featured_media":1454,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"no","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[4,6,3],"tags":[],"acf":[],"yoast_head":"\nBuying or Selling a Business with a PPP Loan? 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