Many companies have received loans under the SBA’s Paycheck Protection Program, and with those borrowers likely to come under close scrutiny from regulators in the upcoming months, potential buyers of a PPP borrower need to take a hard look at issues that may arise as a result of the target’s participation in the program.
This Womble Bond memo provides an overview of due diligence issues that may arise when acquiring a company at various stages of the PPP process – from application through the period following an application for loan forgiveness. This excerpt addresses the issues that arise at the stage many parties may find themselves in during the upcoming months – the period between signing and applying for loan forgiveness:
The period between when an applicant receives a loan (now, a borrower) and applies for forgiveness is the period in which many borrowers are operating right now. Most companies that are eligible and have decided to participate in PPP have already received their funds. The primary challenge sellers and buyers face at this time is assessing how an M&A transaction may impact a borrower’s ability to participate in forgiveness.
The issue is, under the SBA’s current rules, the borrower must wait eight weeks before applying for forgiveness and the lender has up to sixty days to then certify the forgiveness amount (some lenders are saying the certification process should not take that long). What happens if a borrower would like to close an M&A transaction during that time? Is all or a portion of the loan eligible for forgiveness? Should the PPP loan be treated as a bridge loan to be repaid at closing?
During the period after disbursement and before forgiveness is applied, the CARES Act and the SBA’s guidelines are generally not as relevant as the loan documents (typically consisting of a promissory note and one or two consents or certifications) the borrower entered into with its lender. Those documents are where you would find any change of control provisions and prohibitions on change of ownership, the nature of business, assigning the loan documents or the obligations arising thereunder, or selling assets outside the ordinary course.
The memo points out that the loan documents will require the lender’s consent to any transaction that would result in the occurrence of one or more of these events, and that if it is not forthcoming, the borrower will be ineligible for loan forgiveness and the loan will need to be repaid at closing.
– John Jenkins