As the COVID-19 pandemic continues to alter the economic landscape, new obstacles have emerged for business mergers and acquisitions. These challenges are related to economic relief provided to small businesses in response to the pandemic. Businesses across the country applied for and received loans from the Paycheck Protection Program (PPP) that were rolled out as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These loans can be eligible for forgiveness under the Small Business Administration (SBA) program, but the lag in the loan forgiveness process has created new challenges for businesses looking to sell their companies or acquire other businesses. That being said, as of last Friday, October 2, 2020, the SBA finally began approving PPP loan forgiveness applications and repaying PPP loans to the banks that originated them, which is good news for small businesses. If you have not yet submitted your forgiveness application, consider doing so now.
Originally, the SBA required all mergers and acquisitions to receive SBA approval before moving forward. The latest guidance now says that this is no longer the requirement for all transactions, but borrowers and buyers still need to adhere to specific rules. This is good news for some small-business owners who have experienced hurdles in attempting to sell their companies.
On October 2, 2020, the SBA issued new guidance as part of a procedural notice that clarifies requirements for businesses looking to transfer ownership and also helps lenders assisting these businesses. The notice first defines that a “change of ownership” occurs for PPP purposes when at least one of the following is true:
- At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly-traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
- The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
- A PPP borrower is merged with or into another entity.
The guidance goes on to state that borrowers and lenders no longer need to seek SBA approval if the sale or transaction is less than 50% of the company’s equity or assets. It also states for transactions that are 50% or more of the equity or assets, SBA approval is no longer required if:
- The borrower has completed a loan forgiveness application and submitted it to the lender; and
- The borrower has also set up an interest-bearing escrow account with that lender to cover the PPP loan. That escrow account will be disbursed to the surviving entity, minus satisfaction of any outstanding PPP loan balances.
If the proposed transaction will result in a “change in ownership” as defined in the new SBA guidance and the borrower does not meet the two criteria above, it would need SBA approval to move forward. In order to gain approval, the borrower will need to submit the following to the SBA:
- Documentation on the reasons why it cannot fully satisfy the PPP Note by either repaying the note or completing the loan forgiveness process in accordance with the PPP requirements;
- Copy of the executed PPP Note;
- Details of the transaction; and
- Sales documents.
Once these items are provided, the SBA will render a decision on approval within 60 days.
There could be more guidance in the future as the procedural notice stated the SBA may require additional action to mitigate the risk of not paying back a PPP loan. The purchasing entity will be required to take on all of the PPP borrower’s obligations under the PPP loan, including compliance to the latest forgiveness regulations on how the money is spent.
It is important to note that none of the rules in the guidance apply if the borrower has fully repaid the PPP loan or if the loan has already been fully forgiven and the lender has received payment from the SBA. It is unclear if businesses that proceed without following the guidance would potentially lose PPP loan forgiveness eligibility. It is also unclear for what happens to businesses that closed transactions before this updated guidance was released.
Every M&A transaction is different, and with increased complications related to the PPP, businesses looking to sell or buy are facing additional challenges. Our recommendation is to involve not only an M&A attorney but also one of our Transaction Services Partners who can assist on both buy-side and sell-side due diligence on the transaction. This partner will not only help identify and evaluate value propositions while minimizing the risk and exposure but also provide guidance for navigating the evolving regulations coming out from the SBA.
If you are considering buying or selling a business, our experienced Transaction Services team is here to help. In addition, if you haven’t yet performed your PPP loan forgiveness calculations or submitted your PPP loan forgiveness application, contact the Moore Colson team. Our team has experience with forgiveness calculations, knows what to look for and can facilitate the process for you. Be sure to subscribe here to get our news and alerts as they are released as we are committed to keeping you updated on how to navigate the challenges associated with the COVID-19 pandemic.
Bert Mills, CPA, is the Managing Partner at Moore Colson. In his role, Bert sets the vision and mission of the Firm and works closely with the Firm’s leadership to drive and implement strategies.