In March, the future looked blurry – to say the least. COVID-19 cases were spreading across the United States, many states went into economic lockdowns, and large numbers of small businesses suddenly found themselves without enough income to stay open – let alone pay their employees. . In an effort to save the small businesses that support the U.S. economy, the federal government passed the CARES Law, and with him, the Paycheque Protection Program (PPP). Today, almost six months later, small businesses are still in the middle of the P3 loan term. But the world of mergers and acquisitions (M&A) waits for no one, and clinic owners are wondering how the hell their P3 funding can affect the sale of their clinic (or the purchase of another). So let’s talk about it.
Before continuing, please be aware that I am not a lawyer and that I do not offer legal advice. When discussing PPP loans and business transactions, the best practice is to seek formal legal advice, especially from a Chartered Accountant (CPA), lawyer, and / or your PPP lender.
The paycheck protection program is uncharted territory.
As I mentioned in the first paragraph, PPP is quite new. it was created at the end of March via the CARES Law. Under the PPP, “small businesses can take out Small Business Administration (SBA) loans of up to $ 10 million to cover the payroll of employees earning up to $ 100,000 per year.” If borrowers use their loan only on eligible payroll and operating expenses and do not reduce employee payroll, then the loan principal is eligible for forgiveness. (Learn more about the program here.)
Why will PPP affect M&A transactions?
Most PPP borrowers are in the middle of their loan life. Although they have progressed beyond the period covered by the forgiveness (that is, the period during which the PPP loan should be applied to payroll expenses), many borrowers still have to request a loan forgiveness and wait for a loan forgiveness review, or – if the business does not plan to wait for their loan forgiveness – begin the repayment process. And according to this article on JD Supra, “There is no way to expedite the review of a loan forgiveness request.”
In other words, most PPP loans are still very active, and these loans (and their forgiveness eligibility) can be affected by – or affect – a M&A transaction.
A PPP loan can affect the selling price of a clinic.
There are two ways that clinic buyers and sellers can view a P3 loan: as clinic debt or as a possible future inflow of cash. This perception of the loan may affect the terms of the merger and acquisition.
If the loan is considered a debt, then the buyer may want to request an adjustment to the clinic’s purchase price that takes into account the unpaid loan, plus interest. Buyers can also try to mitigate their risk using a lawyer’s escrow account. In this scenario, the buyer can ask the seller to put an amount equivalent to the PPP loan in the custody of a third party (i.e. in receivership). If the PPP loan is canceled, the seller gets the money back. If the PPP loan is not canceled, the buyer gets that money.
On the other hand, a buyer may view a PPP loan (in particular, a loan subject to cancellation) as a future windfall. If this is the case and the buyer is associated with a publicly traded company, then the buyer must be careful not to include a PPP loan fund in a shareholder distribution.
How do alliances play in this?
A legal commitment is essentially a contract between two people (in this case, the buyer and the seller) that acts as “a commitment to do or refrain from doing something”. Some legal bloggers (like the author of this article from The National Law Review) recommend that commercial buyers enter into PPP covenants to help mitigate and manage their risks. This particular article recommends creating alliances that:
- Ask sellers to do their best to request loan forgiveness, from appealing loan forgiveness refusals to initiating legal action for partial loan forgiveness;
- Require vendors to retain all full-time employees and maintain all wages and salaries during the period covered by loan forgiveness, and / or “compel the borrower to comply with one of the safeguards”;
- Require sellers to fully comply with all PPP loan requirements; and or
- Ask sellers to help or manage the forgiveness process.
PPP loans are tied to their original applicants.
This is where the specifics of PPP loan get a bit risky for me, so remember I’m not a lawyer and you should definitely seek real legal advice on this. Having said that, from what I understand, PPP loans cannot be transferred from the clinic seller to the buyer without the consent of the SBA. In addition, when PPP loan recipients sell their businesses during the forgiveness period, the transition from paying many full-time employees to not paying full-time employees can deprive these loans of lending. eligibility for the rebate.
Here is what Revision of national legislation has to say about it:
“It does not appear that lenders are permitted under current SBA 7 (a) regulations to consent to a transfer of assets by a PPP borrower without the consent of the SBA. Even if a lender were to consent to an asset transaction, such a transaction during the period covered by the discount would have a very detrimental impact on the borrower’s ability to obtain the discount because the borrower, at closing, would cease to act. incur reimbursable expenses and would also suffer a reduction (to zero in most cases) in its number of full-time equivalent employees (FTEs), thus reducing (if not eliminating) the forgiveness amount of its PPP loan. Theoretically, the parties could enter into some sort of TSA whereby the borrower would retain its employees (and related expenses) for the purpose of providing services to [the] buyer, but this may be impractical and make the lender’s consent to the transaction even more unlikely. “
Beneficiaries of PPP loans must ensure their eligibility for loan cancellation during merger and acquisition operations.
While the language of the CARES law and the PPP does not prevent participating business owners to sell their businesses, the actual lender (eg, a local bank) may have included restrictive verbiage in the loan documents. for example, “Some PPP loan documents may require the consent of the lender before entering into a transaction involving the sale of the business or substantially all of its assets.” In other words, you may need to notify your bank – or even get their authorization – before selling your clinic to avoid losing P3 loan cancellation eligibility.
So if you are selling your clinic, be sure to review your PPP loan documents and contact your lender, CPA, or lawyer to determine your next steps.
How can a buyer help a seller get a PPP loan discount?
It may go without saying, but if a seller is trying to get a loan rebate after selling a clinic, then the seller must have:
- All relevant documents needed to request forgiveness, or
- Access to relevant documentation if necessary after the sale.
PPP loans have tax implications.
Take into account Employee loyalty credit (ERC): “A refundable tax credit on certain employment taxes equal to 50 percent of the eligible salary that an eligible employer pays to its employees after March 12, 2020 and before January 1, 2021.” This was another initiative of the CARES Act to keep businesses afloat during the pandemic. however, the IRS has explicitly stated that beneficiaries of PPP loans (especially loans that are canceled) are not eligible for CER. The only exception is for PPP beneficiaries who have paid their loan in full before May 18, 2020.
So what does this mean for a clinic buyer? Good, Revision of national legislation says these ERC restrictions also apply to affiliates of PPP beneficiaries – for example, a clinic buyer. The article linked above goes a step further to explain this situation:
“For private equity promoters and their portfolio companies, it appears that all companies in the investment fund’s portfolio could be ‘infected’ by acquiring such a PPP borrower.”
These restrictions can be avoided, but the professional buyer would have to acquire the clinic from the seller through an asset transaction, “which may incur additional transaction costs and result in adverse tax consequences for the seller”.
What about the exemptions?
According to this article by Sensiba San Filippo, the IRS has explicitly stated that expenses paid through PPP loan capital are not deductible. This is because the PPP loans themselves are considered tax exempt income and the IRS wishes to avoid overlapping tax benefits.
Still have questions about PPP or how it will affect your future M&A transactions? Please feel free to ask them below, and our team will do their best to find an answer for you. Remember, however, that we are not lawyers and it is best practice to seek formal legal advice, especially from a CPA, lawyer, and / or your PPP lender.