What impact does a PPP loan have on a business sale? Pursuant to the Paycheck Protection Program under the CARES Act, eligible borrowers can obtain an SBA guaranteed loan to be used primarily for payroll, and which can be forgiven. The PPP loan raises several important issues in connection with a business sale. Most business sale transactions include a working capital target. Should a PPP loan balance be included in the calculation of net working capital? On the one hand, the current portion of any outstanding loan balance would ordinarily reduce working capital. But if a PPP loan is to be forgiven, then there is an argument that working capital should not be reduced. Also, it is common for a loan balance to be paid off at the closing on the sale, especially if the loan is secured by company assets. The PPP loan, however, is neither secured by company assets nor personally guaranteed. The issue therefore arises as to whether the PPP loan will be paid off at closing, again especially if the loan would ultimately be forgiven. Applicants for PPP loans must certify in good faith that the funds to be borrowed are needed and will be used primarily for payroll. Although the SBA recently issued guidance that loans in the amount of two million dollars or less will be deemed made in good faith, what if, upon an audit of the loan by the federal government, it is determined that the loan was not obtained in good faith? It would be reasonable to provide for this possibility to be covered in the indemnification section of the purchase agreement. As can be seen, although PPP loans can be beneficial to borrowers in need as a result of the current CV-19 pandemic, the seller and purchaser should give careful consideration to the impact of the PPP loan on the transaction.
If you have any questions about this or any other M&A issue,
please contact Glenn Solomon at email@example.com or 443-738-1522.
ABOUT GLENN D. SOLOMON
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Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
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