PPP Loans Complicate Deals

Marty McCarthy, CPA, CCIFP
Focused on You. Dedicated to Your Success.
September 3, 2020

Many business owners are closing or selling their businesses because of the pandemic. I read an article entitled Buying or selling a business? PPP loans will complicate the deal by Andy Medici in the Philadelphia Business Journal which I would like to share with you. Here is a summary of the article: 

  • Small-business owners who took the Small Business Administration's Paycheck Protection Program loans will need to jump through some hurdles if they want to buy — or sell — a company, which could cause substantial delays.
  • Buyers and sellers need to decide how to treat the PPP loan and how to handle the debt.
  • Businesses may have to get approval from the SBA, through their lender, if they are making any transaction involving equity. 
  • Bank delays in setting up their programs and the long possible lag times could tie up the transaction. 
  • Buyers really need to be aware that they are buying a potential problem. Sellers should indemnify buyers for problems that could happen in the next three years.

When it comes to the actual transaction itself, experts break down the three options as:
  1. Put some amount of money in escrow to cover the loan or some portion of the loan in case it is not forgiven.
  2. Pay off the loan entirely before or during the transaction, which gets rid of the forgiveness benefit.
  3. Account for the loan and its effects on the business’ financial situation and keep the loan on the books for the combined entity, assuming that combination does not run afoul of any SBA rule for PPP loans, including size limits and rules on affiliated entities.

If you sell your company without following SBA rules, you run the risk of an unforgiven PPP loan. 
And so far, the SBA has not said it would clarify its existing rules to provide more guidance on possible mergers or acquisition activity.

Companies that took an employee retention tax credit are not allowed to also get a PPP loan. This exclusion could apply to a potential buyer.

While legal experts said that PPP-related M&A activity is still in its early stages, those deals will begin to pile up as those businesses with extra cash start snapping up others that have struggled amid the Covid-19 pandemic, especially as their PPP loan dollars run dry.
 
 We will continue to keep you updated. Please visit our COVID-19 Resource Page for more alerts.

Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@MCC-CPAs.com. I can be reached at Marty.McCarthy@MCC-CPAs.comAs always, we are happy to help.

Stay safe,

Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).