Paycheck Protection Loans Could Complicate Small Business Acquisitions

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Paycheck Protection Loans Could Complicate Small Business Acquisitions

Earlier this year, as the coronavirus pandemic and the mandated closures that came with it battered the United States economy, Congress authorized the Paycheck Protection Program (PPP), which would be managed by the Small Business Administration (SBA). The idea was that entrepreneurs could obtain the funds necessary to keep their business afloat and keep their staff employed during the uncertain times. Then, provided they met certain requirements, part or all of their initial loan would be forgiven.

The program proved extremely popular, burning through its initial funding allotment in less than two weeks. Despite its hiccups, PPP has managed to help thousands of small business owners nationwide. That said, it seems that the loans could have some unforeseen drawbacks.

As the Washington Business Journal reports, small businesses that obtained Paycheck Protection Program loans and are now looking to sell their business could find that said loans are complicating the process. For one, if it’s unclear whether an outstanding PPP loan will be approved for forgiveness, it may be difficult for the buying and selling parties to structure a final deal. What’s more, the Journal notes that businesses are required to get SBA approval (via their lender) if they are to make any transactions involving equity. Currently, guidelines regarding PPP loans and acquisitions remain unclear as well, potentially giving would-be buyers pause.

Despite these challenges, according to experts, there are a few ways that businesses who have accepted PPP loans to go about drawing up a transaction. One option would be to simply have the seller pay off the loan before the sale is made. Unfortunately, this would nullify the loan program’s forgiveness benefit. Another potential solution would be to hold funds in escrow until the loan’s final status is determined. Finally, the acquiring entity could leave the loan on the books and handle it after the fact. However, once again, such a deal would need to adhere to the SBA’s rules and regulations for PPP loan qualifications.

Although these could be potential solutions, PPP expert and Arnall Golden Gregory LLP partner Tenley Carp is bearish on the idea of small businesses trading hands at this time. Speaking to the WBJ, she said of business that have PPP loans, “That is going to tie up the transaction so no one is even talking about waiting to execute the deal until the loan is forgiven anymore.” Carp added, “The buyers really need to be aware that they are buying a potential problem, and they should really force the sellers to indemnify them for problems that could happen literally not just a year down the road or two years down the road, but maybe even three.”

Like some of the other challenges that the Paycheck Protection Program has endured so far, this question of what happens to loans after a business is acquired will demand more attention. With the issue now being raised, hopefully it’s something that business owners will get more clarity on in the coming weeks. In the meantime, those looking to buy or sell a small business may need to get creative in how they solve these potential problems.

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Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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