PPP Loan Recipients May Face M&A Restrictions

If your business received a PPP loan and is now considering a merger or acquisition, you need to check that the activity is allowed under the SBA regulatory guidelines. PPP loans, like other Section 7(a) loans, require (in most cases) that borrowers get consent from the SBA before performing certain activities, including a change of ownership within 12 months of the loan disbursement. 

What this means for lenders…

There are several provisions stating that lenders must get SBA consent before allowing a loan recipient to perform certain actions. 

  • The SBA must approve any change of ownership of a borrower that happens within a year of receiving the loan. It is unclear what the minimum threshold is to trigger a change of ownership though. 
  • Sales of assets likely don’t fall under this guideline, since the selling company still maintains ownership. 
  • Asset acquisitions seem to be handled differently, however. The SBA has recently informed some PPP lenders that they don’t differentiate between a change of ownership and asset acquisition, and therefore these lenders must get permission before approving an asset sale, merger or acquisition. Failure to get the required consent can mean the lender loses PPP loan SBA guaranties.
  • PPP borrowers are also limited in the business and ownership changes they can make, specifically transactions where the business owner “reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Those that don’t ask for, and receive, this consent could have their loan forgiveness denied or even be required to repay the full PPP loan immediately. 

What this means for buyers…

Buyers need to review several items if they are looking to buy a business that received a PPP loan to ensure that it will qualify for forgiveness. Areas to look for include: 

  • If the business eligible to receive the loan according to SBA affiliation tests?
  • Is the borrower using the PPP funds to support operations as required?
  • Does their documentation support the amount of the PPP loan?
  • Is the company complying with the rules that guide the PPP program?

Additionally, potential buyers should analyze the impact that the PPP loan – and its forgiveness – could have on the valuation of the company and the taxes it must pay. They should also be sure to include language that requires the target company to comply with all PPP rules and add language that protects the purchaser if PPP-related issues arise after closing is complete. 

Buyers should keep in mind that it can take up to 2 months for the SBA to approve an acquisition, and that approval is in no way guaranteed. Even if it is SBA-sanctioned, there are often restrictions on the acquired company’s operation that may make the transaction much less attractive. Ideally, the buyer should wait for SBA approval and for loan forgiveness approval, if possible, to avoid any unexpected issues. If that is not an option, the buyer should consider setting up an escrow that can be released once forgiveness is given and definitely include language in the final agreement that covers all of these bases and protects their investment. 

This is complicated stuff with many caveats. If you are thinking about merging or acquiring a company that received a PPP loan, discuss these issues with your attorney and also contact us to discuss the transaction and its financial and tax implications. We are happy to help! 

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