PPP Financing in M&A Transactions

The PPP and other CARES Act loan programs implemented in response to the coronavirus pandemic have various implications on pending and potential M&A transactions. The unique features of the PPP loans in particular and the volume of such loans in the marketplace have resulted in novel issues for M&A practitioners.

If a PPP loan is already in place, then the parties must consider whether an M&A transaction involving the borrower could trigger a default under a PPP loan. If the parties desire to keep the loan in place post-closing, prior lender and SBA consent may be required. Such a consent process may dictate the ability to keep the loan in place and delay the parties' desired timeline for the transaction. In October 2020, the SBA released guidance clarifying its approach toward changes of ownership and providing for a "safe harbor" from the requirement to obtain prior SBA approval for certain transactions. Buyers and sellers may need to consider structural alternatives to accommodate leaving a PPP loan in place in connection with an M&A transaction.

For transactions in which a PPP loan remains in place post-close, there are several alternative options for accommodating pending or future forgiveness applications depending on the parties' intentions. Given the SBA's heightened scrutiny of forgiveness applications, buyers seeking to acquire a PPP borrower should evaluate the borrower's compliance with PPP loan terms, including the target's eligibility, taking into account the SBA's affiliation rules and whether the necessary certifications were appropriate.

Buyers should consider requiring reps and warranties regarding PPP compliance and indemnities from the seller, especially when the valuation of a target company hinges on the forgiveness of an outstanding PPP loan. In turn, the seller might require post-closing covenants to ensure the buyer will seek forgiveness and prevent the buyer from taking courses of action that may negatively impact forgiveness.

Listen as our authoritative panel discusses these and other issues essential to address when one of the parties to a merger has a PPP loan in place.

1. Primer on PPP and observations on what we’ve learned so far
2. Treatment of a target's outstanding PPP loan
   1. To repay or not to repay
   2. Required approvals and SBA safe harbor conditions
   3. Options for handling PPP forgiveness
   4. Impact of PPP on net working capital
3. Identifying and protecting against relevant PPP loan risks
   1. Due diligence and risk identification
   2. Seller representations
   3. Indemnification and risk allocation
4. Financing considerations and lender insights
   1. Consents/waivers
   2. Financing conditions

The panel will review these and other key issues:

• What have we learned so far in negotiating around these PPP loans?
• When is the lender's and/or SBA's consent to the acquisition of a PPP borrower required, and what is the process for obtaining such approval?
• What conditions must be met and what actions need to be taken to take advantage of the safe harbor from the prior SBA approval requirement (if applicable)?
• How should buyers and sellers approach transaction structuring to preserve the value of potential forgiveness of the PPP loan in the context of an M&A transaction?
• How should buyers conduct due diligence concerning a PPP loan and structure contractual recourse, including representations and warranties and indemnities, to both mitigate compliance risk and preserve the value attributable to forgiveness?