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M&A: Considerations for PPP Loans

As the effects of the pandemic press on, we are seeing an uptick in M&A (mergers and acquisitions). M&A is a natural byproduct of an economic downturn. While this one is a doozy and not like any we have seen before, we anticipate M&A transactions might be in the distant future for some businesses that may not be able to survive the storm. Conversely, you might see M&A as an opportunity to expand your business or your market.

If you find yourself considering a transaction, whether you are selling your business or buying another, there are some unique considerations for any business that currently holds a PPP loan.

Employee Retention Credit (ERTC)  

The ERTC is a refundable payroll tax credit that was included in the CARES Act. The credit is 50% of certain wages paid to employees up to a maximum of $10,000 per employee. The maximum credit per employee is $5,000.  One of the restrictions on the ERTC program is that a business that received a PPP loan is not eligible to take advantage of the ERTC. If one of the businesses in a transaction has been utilizing the ERTC and the other business has a PPP loan, the conflict should be resolved before the transaction is finalized. This should come as no surprise to you that there is no official guidance on what should be done in this scenario. At a minimum, it seems logical that the business utilizing the ERTC would discontinue doing so. Conversely, the other party could repay the PPP loan, or obtain forgiveness from the SBA prior to the transaction to resolve the conflict. 

PPP Loans

The greatest concern we have for businesses contemplating a transaction when one or both of the businesses have a PPP loan is whether the transaction will trigger default under the loan agreement. This may result in an inability to receive loan forgiveness as well as require immediate repayment. There are a lot of different versions of PPP loan documents out there. One I read this morning has a provision that default occurs for “any other termination of Borrower’s existence as a going business” and also has a “Continuity of Operations” paragraph that requires prior written consent of the lender to engage in any sale, merger, purchase or other restructuring. 

These restrictions are not new, and you will likely find them in any promissory note or business loan agreement you have with a lender.  Under normal circumstances, if you were considering a transaction, you would bring your lender into the discussions as the transaction may technically be a default. In many cases, the lender is simultaneously repaid or may agree to sign off on a loan continuation under new ownership with revised terms.

SBA and Section 7(a) of the Small Business Act

The unique situation we are faced with under PPP is that there is a third party, the SBA. While the SBA is not a party to the loan documents themselves, you will find provisions within your business loan agreement that refer to compliance with the SBA’s PPP specifications. The PPP falls under Section 7(a) of the Small Business Act.  Under 7(a) regulations, transactions involving a change in ownership require the prior written consent of the SBA. Reference this procedural notice from April 2019

Another interesting twist arises when both a buyer and seller have PPP loans. Guidance from the SBA specifically says that a borrower may only receive one PPP loan. In addition, eligibility included certain size requirements. While the buyer and the seller both met all these rules when they applied, will there be a lookback to eligibility if forgiveness is being assessed after a transaction? We certainly hope not but thought it prudent to bring it up.

Employees of Surviving and Non-Surviving Entities

One last consideration is who the employees work for after the transaction. The PPP forgiveness calculations require a look at FTEs during the covered period compared to a base period. If the transaction occurs during the covered period, and there is only one surviving entity that employs all employees, does that mean the FTE count of the non-surviving entity is now zero? How will that affect the forgiveness computations? Again, there is no guidance for this situation.

So, what should you do? Talk to an attorney with SBA 7(a) experience and talk to your lender. Ask the attorney and/or lender to reach out to the SBA for guidance on your situation. Not all transactions are the same.  Sometimes ownership changes are merely the result of a buyout of a retiring partner. Is this type of change significant enough to trigger default? There is no authoritative guidance we can find to answer this question. 

Ideally, a business would apply for and receive a forgiveness decision from the SBA prior to closing. But no one knows how long the approval process is going to take. Depending on the transaction, it may be in the best interest of all parties to forego forgiveness. If there are viable reasons to proceed with and close on a transaction before the SBA decision is received, consider indemnification clauses, or even escrowing funds at closing. 

PPP Loan Forgiveness Audits

Lastly, there’s the risk of audit. The SBA has given themselves ample room to audit just about any forgiveness application they see fit to audit. It is unlikely the audits will be swift. Who will be on the hook if a future audit results in a liability? While probably a remote scenario, it is something both parties should consider in the transaction negotiations and final documents.


We realize we have posed more questions than answers. Without guidance from the SBA, everyone considering a transaction is admittedly flying blind. Our objective is to make your aware of the various issues that may arise so that you can seek legal counsel and implement the necessary protections for yourself and your business.

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