How to Navigate an M&A Transaction with a PPP Loan
As the reality of the pandemic and its longevity begins to sink in for American business owners, many are realizing that they can’t put their companies’ futures on hold forever. For some, this means moving forward with potential mergers and acquisitions. In light of the various relief programs offered to companies, namely the PPP loan, buyers and sellers now face unknown territory when it comes to closing a deal in this new COVID business environment. When the selling company already has an outstanding PPP loan in place, it is especially important to know the risks and how to protect yourself, either as a buyer or a seller.
Where should you start?
One of the first and most important considerations during an M&A transaction involving a PPP loan is whether to repay the loan as part of closing or to keep the loan outstanding post-closing. Though it can have a significant impact on the terms of an M&A deal, the decision is not solely up to the buyer and seller – the lender and the SBA also play an important role. Here are some key considerations:
- Analyze the terms of the loan. Most loan terms will be based on the form issued by the SBA, which stresses the importance of lender consent. Companies that try to sell without the lender’s consent risk being in default of the loan. Further, if the change in ownership occurs within the first 12 months of receiving the loan, then the lender must seek approval from the SBA before giving consent. These requirements can often create significant potential delays in the close of a transaction.
- Do your due diligence. While most loan terms are based on the SBA-issued form, not all loan terms are the same. Many lenders used their own unique forms, which could range from a minimally modified version of the SBA’s terms to an entirely unique set of terms. The specific terms of a borrower’s PPP loan will dictate the options available when closing a transaction, including whether it is possible or beneficial to keep the loan outstanding post-closing.
Considerations for Sellers and. Buyers
Buyers and sellers each have different risk factors and different motivations when negotiating an M&A transaction; the treatment of an outstanding PPP loan is no exception.
From a seller’s perspective:
- Seller’s should try to preserve the potential loan forgiveness amount or negotiate compensation for the forgiven portion of the loan.
- It is more beneficial for sellers to try and exclude an outstanding PPP loan from treatment as indebtedness in order to prevent a reduction in purchase price consideration.
- A delay in the timeline of the deal would allow the seller time to submit a forgiveness application and potentially obtain forgiveness before closing the transaction, but delays may increase the risk of the buyer backing out.
- Delays may be unavoidable depending on the terms of the loan, so sellers should first understand whether consent or approval from the lender and SBA will be necessary.
- If sellers retain the PPP loan post-closing, consideration should be given towards the potential impact on the amount of loan forgiveness.
From a buyer’s perspective:
- Buyers will benefit from an arrangement where the seller repays or receives forgiveness of the PPP loan before closing the transaction.
- Insisting on repayment of the loan offers the benefit of acquiring the company debt-free. It also allows the buyer to distance themselves from any negative associations or liabilities related to the PPP loan.
- Buyers that don’t push for repayment and instead allow the seller to seek forgiveness should be aware that the forgiveness process could delay closing the deal by 150 days or more, including a 60-day period for the lender to approve the forgiveness application and a 90-day period for the SBA to approve and disperse the forgiveness.
- If closing occurs before repayment or loan forgiveness, buyers may benefit from placing the potential forgiveness amount in escrow to be released upon the receipt of forgiveness.
The Power of the Lender
For M&A transactions involving outstanding PPP loans, the PPP lender has the ultimate power and will be the sole decider in whether the loan should be repaid in full before closing the deal. Because the PPP loan is still so new, it is hard to gauge how most lenders will act.
Some may not require repayment since the intent of the program is for borrowers to receive forgiveness, while others may be more inclined to recover the funds through repayment and use that capital towards other loans with more standard market terms.
The lender’s decision is likely also to be influenced by other extenuating circumstances, such as the creditworthiness of the new buyer, the relationships with the lender, and debtor demand.
The Bottom Line
M&A transactions are always complex, and factoring in outstanding PPP loans only adds to the complexity. Whether you are a buyer or a seller pursuing an M&A deal, it is critical that you understand all of the risks and factors at play. The existence of a PPP loan can change the motivations of both buyers and sellers, and the uncertainties associated with the new loan program can make the lenders’ decisions unpredictable.
If you are actively evaluating either acquiring or selling a company with a PPP loan, consider working with an Aprio advisor from the Transaction Advisory Services team to assist with understanding the implications and building a strategy for structuring the transaction. Contact Michael Levy, Cardell McKinstry, or Chris Williamson with questions.