Change of Ownership Impacts on PPP Loan Borrowers and Private Equity’s Strategy

Following EisnerAmper’s Alert on the Small Business Administration (SBA) issuing a procedural Notice on Paycheck Protection Program (PPP) loans and changes of ownership, private equity investors are expected to continue to be actively seeking investments in platform companies and bolt-on deals for  the remainder of 2020 and most likely all of 2021, as they have unprecedented amounts of dry powder that must to be put to work.  Many of the companies raising institutional capital since the Summer of 2020 have taken PPP loans, which now must be taken into consideration when structuring any transaction. 

Many private equity funds have made the determination that they do not want any of their controlled companies to have PPP loans due to the optics of accepting government assistance and dealing with the issue of need certification.  Financial buyers have a few options to consider.  First, they could treat the PPP loan like a debt-like item to be paid at closing.  In this scenario, the seller will repay the loan and the liability is eliminated as the PPP note is now fully satisfied.

Another option, if possible, is to delay the close until the seller has filed the PPP Loan Forgiveness Application and received final determination of loan forgiveness from the SBA. Final determination of the forgivable amount can take up to 150 days (60 days for lender and 90 days for the SBA).  The delay can also increase risk as the business could be impacted and the sellers could have a change of heart around purchase price or even their desire to sell the business during any delay period.  It should also be considered that there would be a full audit by the SBA of any forgiveness application of any company that took out more than a $2 million PPP loan, so the buyer would be well advised to protect themselves through indemnifications and appropriate escrows in the purchase agreement. 

Assumption of the PPP loan by the buyer could be another option.  In this scenario, the buyer would be assuming more risk; in order to mitigate that risk, there should be significant pre-close diligence placed on the need certification, documentation the seller provided to originally secure the PPP loan and documentation supporting the forgiveness application. The buyer will also want to consider setting up an escrow account that will be released to the seller once the PPP note is fully satisfied.  Lastly, the buyer will need to set up proper indemnifications to mitigate against a future audit associated with the original PPP loan.