Selling a business with an outstanding PPP loan adds a level of complexity to the closing process. On October 2, 2020, the SBA released a procedural notice defining the required steps. Below is a summary of the SBA notice regarding the sale of a business with a PPP loan.
Both, potential Buyers and Sellers should review the attached notice and contact us to understand the latest in this quickly evolving process.
First, here is what the SBA defines as a “Change of Ownership”: “…(1) at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.
If your sale falls into the above category, the SBA further defines your transaction as one of the two:
1. The PPP Note is fully satisfied. or
2. The PPP Note is not fully satisfied.
Let’s go over “1. The PPP Note is fully satisfied.” – This means there are no restrictions on the sale of your business because you either paid off the loan or the SBA has “forgiven” the loan and has paid the PPP lender directly for the outstanding loan amount. As of this writing, the SBA is developing portals to submit loan forgiveness, so it is highly unlikely that many transactions will fall into this category.
Now, let’s discuss ” 2.The PPP Note is not fully satisfied.” – If this statement is true, there are basically two options. Let’s call them the “Faster Way” and the “Slower Way“.
Faster Way – Defined as “faster” only because it’s faster than the other way. Actually time to completion depends heavily on the responsiveness of the PPP Lender. In a nutshell – Apply for forgiveness by submitting the necessary paperwork to the PPP Lender and have them open an interest bearing escrow account in the amount of the PPP loan. The change of ownership can complete without the SBAs pre-approval. The seller can fund that interest bearing escrow account directly or have it funded through the proceeds from the sale. Either way, those funds will not be released until the SBA has either forgiven the loan and paid the PPP lender, or has ruled to not forgive the loan and the funds are released to the PPP Lender as loan repayment. If the PPP Lender is capable and willing to open the interest bearing escrow account, and the seller is willing to fund that escrow account until SBA provides a decision, the sale of the business can complete within the normal escrow cycle with no delays.
Slower Way – If the “Faster Way” cannot be applied for any reason, the seller must apply for forgiveness through the PPP lender by submitting the necessary paperwork. The PPP Lender will then submit the required documents to the SBA for review. The change of ownership cannot be completed until SBA has completed their full review and has provided a “determination”. The loan must either be forgiven or paid off prior to the change of ownership. As of this writing, the SBA states they will provide a determination within 60 days. This way should be avoided if at all possible. As I’m sure we’ve all heard, and some of us know, time kills deals.
To protect against the uncertainty and risks of PPP forgiveness, purchasers should require additional diligence, and both parties may seek special representations, and/or indemnity provisions from the other. Mutual consideration should be given to deeming the PPP loan like any other indebtedness that is to be repaid in full at closing, but in that scenario, the seller’s relinquishment of forgiveness value may also influence the purchase price. In any event, buyers and sellers will both need to carefully consider the allocation of PPP loan benefits and risks, and the process of future loan forgiveness. In turn, such consideration will influence the negotiation and drafting of M&A transaction documents. Deal components that should be considered in light of PPP include:
Purchase Price Adjustment; Escrow. A purchaser may consider negotiating for an adjustment to the purchase price for any loan amount not forgiven, including interest. The PPP loan may need to be a separate component for adjustment taking into account the potential prolonged period that may be required to determine whether the PPP loan will be forgiven, and if so, in what amount. Purchasers might also request a separate escrow in the amount of the PPP loan principal and interest, to be released upon forgiveness.
Indemnification. If an adjustment for any unforgiven PPP loan amount is not included in the purchase price adjustment section, purchasers might seek seller’s indemnity to that effect. Even if the parties agree to an adjustment to the purchase price in respect of the loan amount, purchasers might seek a specific indemnity in respect of costs and expenses of an audit and/or litigation, and any criminal and/or civil liabilities and penalties, especially if such liabilities arise from seller’s earlier certifications and use of loan proceeds.
Whether you are planning to Buy or Sell your business, having a PPP loan ads another layer of difficulty to a multifaceted process. You should discuss with an experienced Business Broker. The Business Brokers at 1-800-Biz-Brokers have been helping entrepreneurs buy and sell their businesses since 2006.
You can download the SBA Procedural Notice here: PPP Loans and Changes of Ownership