Considerations For M&A Targets Holding PPP Loans

By Michael Shaw and Peter Shepard
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Law360 (September 17, 2020, 3:30 PM EDT) --
Michael Shaw
Michael Shaw
Peter Shepard
Peter Shepard
Following the rapid spread of the COVID-19 pandemic in early 2020, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security Act, which allocated an unprecedented amount of federal aid to assist American citizens, businesses and local governments. One foundational element of the CARES Act was the Paycheck Protection Program, which provided forgivable loans to qualified businesses. 

Each applicant's loan amount was determined based on such applicant's prepandemic payroll and designed to provide qualified businesses with the necessary funds to retain their employees even if the applicant's business suffered material losses. Although mergers and acquisitions markets initially stalled, many businesses have subsequently regained their appeal as acquisition targets. 

As businesses with PPP loans begin to examine a potential sale, there are several considerations they must take into account, particularly to protect their ability to obtain forgiveness of any PPP loan.

When a PPP seller is looking to sell its business, the structure of the transaction has a significant impact on whether (1) the seller can utilize any unused amount of its PPP loan and (2) the seller will be able to obtain loan forgiveness. This article will examine different transaction structures and how they affect the PPP seller, as well as protections sellers can seek.

Asset Sale

In an asset sale, the PPP loan would likely be retained by the PPP seller since (1) it is not transferable without the lender's consent, which lenders have been hesitant to provide given the contradicting guidance provided by the U.S. Small Business Administration and the uncertainty of loan forgiveness, and (2) a buyer would likely exclude the PPP loan from the transaction to isolate any potential liability resulting therefrom.

If the PPP loan was not fully utilized as of the closing of the sale transaction, the PPP seller will have difficulty dispensing the remainder of the loan since it would lack any business or employees. However, the advantage of an asset sale for a PPP seller is that it would obtain all the benefits of the PPP loan and any forgiveness of it. As a result, a buyer in an asset sale will typically request full indemnification from the PPP seller for anything relating to the PPP loan.

Equity Sale

The sale of the PPP seller's equity creates a more complex scenario for a buyer and seller. In this circumstance, the PPP loan — assuming it is not forgiven or paid off prior to, or concurrently with, closing — will be included in the transaction since the PPP seller's company remains intact. As a result, the buyer and PPP seller should negotiate how the benefits of the loan, and any forgiveness thereof, will be shared by the parties.

This issue must be addressed early in the process to ensure that the transaction does not jeopardize such forgiveness and the PPP seller retains its fair share of such benefits.

The issues which must be negotiated include the following: (2) which party benefits from any unused portion of the PPP loan, (2) how the parties share the benefit of any forgiveness of the PPP loan, and (3) how the parties share any liabilities relating to the PPP loan if it is not forgiven or any audit determines that all, or a portion, of the PPP loan should not have been made.

Due Diligence

PPP sellers must engage in their own due diligence process to protect their ability to be granted loan forgiveness.

First, to receive the PPP loan, the PPP seller made several certifications regarding its size, access to liquidity and uncertain financial future given the pandemic. Given recent guidance provided by the SBA, it appears that recipients of PPP loans will be required to reaffirm these certifications to apply for forgiveness. Given that, it is important for a PPP seller to understand any circumstance that may prevent the PPP seller, after having its equity purchased by a buyer, from truthfully making such certifications.

PPP seller's diligence should include seeking information regarding the buyer's size (i.e. number of employees after applying the affiliation rules in Title 13, Sections 121.103 and 121.301 of the Code of Federal Regulations), any outstanding PPP loans the buyer or its affiliates received or applied for, and any other circumstance that may prevent the PPP seller from having its PPP loan granted forgiveness.

Furthermore, the PPP seller should also understand whether the transaction would increase the buyer's size or outstanding PPP loan amount above the legal limits, as this would jeopardize any loan forgiveness. PPP sellers should be keenly aware of buyers that are, or are owned by, a private equity fund, as it is likely that the affiliation rules would disqualify a PPP seller from being granted loan forgiveness.

Purchase Agreement

In an equity sale, a PPP seller should also seek the following covenants in the purchase agreement to protect itself:

  • PPP seller determines use of the PPP loan following the closing;

  • Buyer is refrained from taking any action that will jeopardize the PPP seller's ability to secure forgiveness — i.e. restraints relating to terminating employees, applying for PPP loans, making distributions, reducing compensation, paying certain levels of executive compensation, etc.;

  • PPP seller is authorized to handle any audit relating to the PPP loan; and

  • Buyer is required to use commercially reasonable efforts to assist the PPP seller in securing complete forgiveness of the PPP loan — i.e. signing documents, participating in audits, etc.

The PPP seller should also seek representations and warranties from the buyer in the purchase agreement covering items that may impact the PPP seller's right to loan forgiveness, such as the buyer representing (1) whether it has applied for or received a PPP loan, (2) its size and number of employees (after application of the affiliation rules), and (3) whether it has terminated any employees, reduced compensation or taken any other action which may adversely impact loan forgiveness.


Despite the M&A market coming to a standstill at the outset of the COVID-19 pandemic, deal activity has quickly bounced back. While sellers face the same business and legal issues they have traditionally faced in an M&A transaction, sellers that have obtained PPP loans need to be particularly focused on how the sale of their company will impact the PPP loan and forgiveness thereof.

While government regulations are fluid and still being determined, sellers need to structure transactions to their benefit and request representations, warranties and covenants from buyers to protect themselves.

In addition, sellers need to undergo additional due diligence on a buyer to understand the buyer's impact on the PPP loan and forgiveness. By properly structuring the transaction, understanding the impact the buyer will have and protecting themselves in the purchase agreement, sellers can retain the benefits of the PPP loan while also receiving the benefits of a sale transaction.

Michael Shaw is a principal and chair of the business and finance group at Much Shelist PC.

Peter Shepard is an associate at the firm.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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