SBA guidance on PPP loans has been sporadic and often leaves small businesses with more questions. Recent questions surrounding the impact of the sale or acquisition of a business on a PPP loan have surfaced. Specifically, how does the purchase or sale of a business where a PPP loan is involved affect the terms and forgive-ability of the loan? The following factors should be considered when buying or selling a business where an outstanding PPP loan is involved:
Violating the Terms of the Loan
PPP loan documents likely prohibit a change in size or structure of a business while a PPP loan is outstanding, without prior consent of the lender. A change of this nature without the consent of the lender will constitute a default on the loan.
Affiliation and “Small Business” Status
The purchase of a business will change the size of the purchaser. Should the acquisition cause the borrower to exceed 500 employees, it will no longer be deemed a small business under the CARES Act. It is not unreasonable to consider the possibility that the SBA, in analyzing loan forgiveness, may treat the use of pre-acquisition and post-acquisition funds differently.
For a PPP loan to be eligible for forgiveness, the CARES Act requires “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient” at the time of application for a PPP loan. Thus, both the buyer and seller in a business transaction need to be aware of how purchase funds and access to increased liquidity and capital may affect the “necessity” requirement of a PPP loan.
Approaches to the Purchase or Sale of Business with a PPP loan
Delay closing until loan forgiveness is determined. If the parties delay the closing until the application for forgiveness of the PPP loan is processed, the closing can take place without PPP loan involvement. It is important to note, however, that if forgiveness is denied in whole or in part, the amount of the remaining loan may become a negotiated cost or term of the closing.
Forgo forgiveness of one of the loans. If the purchase of a business must take place while a PPP loan is outstanding, and doing so affects the forgiveness of the loan, a borrower may decide to forego the forgiveness factor altogether in the interest of expediency. A cost analysis should be done beforehand to determine the financial impact on the borrower.Back to news