How to Approach M&A with a PPP Loan
M&A transactions often involve unique intricacies, and that is certainly the case in the era of COVID-19.
In response to the economic disruption caused by the coronavirus pandemic, more than 7.34 million loans have been approved under the Payroll Protection Program (PPP). This creates a new obstacle for acquirers to navigate as they consider the complete financial situation of prospective targets. The fact that these low-interest loans can be forgiven, and the regulatory scrutiny involved, make them different from ordinary debt.
Although these loans may complicate the process, buyers can take steps to adequately prepare and successfully execute a deal.
First, we recommend sellers try to get their PPP loan forgiven before pursuing a deal. But if a prospect has an outstanding PPP loan, the seller should work alongside the buyer to get the loan forgiven before their deal closes. It makes the entire process run more smoothly and eliminates the need for approval from the lender or the Small Business Administration (SBA).
It is not always possible or ideal, however, to delay a transaction to accommodate this strategy. Fortunately, even when a PPP loan is held through the closing of a deal, there are ways to keep a deal on track.
Handling a PPP Loan through Deal Closing
If a seller is still holding a PPP loan through the due diligence stage of a deal, a buyer should consider how the loan will impact a transaction. The SBA has provided guidance on the issue, as has the IRS.
The lender should be involved in discussions to ensure the seller is in good standing on the loan. In fact, the borrower (seller) is required to notify the lender about a planned change of ownership and provide the PPP lender with a copy of the proposed purchase and sale agreements.
To obtain prior approval for a change of ownership, the lender must submit a request to the SBA that includes:
The reason that the PPP borrower cannot fully satisfy the PPP Note
Details of the requested transaction
A copy of the executed PPP Note
Any letter of intent and transaction agreement setting forth the responsibilities of the deal participants
Disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number
A list of all owners of 20% or more of the purchasing entity
It is worth noting, there are cases in which the SBA’s approval is not needed, such as when a change of ownership is less than 50% or the deal is structured as an asset sale.
Diligence is critical throughout the process. Here are a few questions the buyer can raise with the seller:
Was the target eligible to receive the PPP loan?
Why did the target seek a PPP loan in the first place?
Has the target complied with the SBA’s terms of the loan and is there adequate documentation?
Does the target have a plan in place for handling the tax implications and other details of the loan, whether or not forgiven?
Furthermore, PPP loans should be a factor in reps and warranties and post-closing covenants.
What to expect throughout 2021
As the pandemic-era relief programs such as PPP phase out, we expect distressed M&A activity to pick up. Buyers should be aware of the status of a target’s PPP loans and consider all the potential implications of a PPP loan.
Be prepared for additional scrutiny and a delayed closing due to the implications of PPP loans involved in deals.
As an advisor to both buyers and sellers, Copper Run helps navigate the intricacies of PPP loans to ensure they do not impede a successful transaction. If you are unsure how a PPP loan may impact your business going forward, contact Copper Run for more information and guidance.
Shawn Byerly is the Managing Director of Copper Run’s Cincinnati office. He is focused on providing the firm’s clients with mergers and acquisition advice in a variety of sectors including business services, manufacturing, distribution, healthcare, and logistics.