How Are Practice Buyers and Sellers Impacted by PPP in Asset Sales?
THE FOLLOWING IS A COMPILATION OF INFORMATION FROM INDUSTRY EXPERTS AND DOES NOT REPRESENT LEGAL ADVICE. IF YOU HAVE QUESTIONS ABOUT THE TOPICS ADDRESSED HEREIN, CONSULT YOUR ATTORNEY.
Buyers
This one is easy. With asset sales, buyers should not have exposure to risk associated with PPP loans granted to sellers. However, to accommodate sellers so that some deals can go to closing, buyers may agree to hire a seller’s management company which retains a seller’s employees until PPP loan forgiveness criteria has been satisfied.
Buyers who are using SBA loans to fund practice purchases should not be impacted when purchasing practices that received PPP monies from the SBA.
Sellers
The key to managing seller exposure to risk associated with PPP loans is found in the default provisions of the loan documents.
The PPP Note includes these default events:
“(iv) the borrower has an adverse change in its financial condition or business operation that the lender believes may materially affect the borrower’s ability to repay the PPP loan
(v) the borrower reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the lender’s prior written consent”
Lenders have wide discretion regarding approval of practice sales for practices that received PPP monies. Would the sale of a PPP borrower’s practice be considered by a PPP lender to be a change that materially affects a borrower’s ability to repay? My bet would be yes.
A PPP borrower would then need to obtain prior written permission from their PPP lender to sell their practice. It is likely that some Bank Presidents will not want to stick their necks out on this one. If they do, that’s great, don’t make a production out of it, just get their signatures. Some closings have already occurred with the sellers simply giving notice to their PPP lenders that they were selling their practices and the lenders said nothing. But this is not what the PPP Note states. It requires prior written consent.
If there is pushback from a PPP lender that is reluctant to give prior written consent, then the practice seller may need to place an amount equivalent to the PPP loan amount in escrow at closing to cover any future loan repayment liability. It seems reasonable that if the PPP lender receives documentation that the full loan amount will be held in escrow until a final determination of the seller/ PPP borrower’s loan forgiveness status is determined, that a PPP lender would give prior written consent to the sale of that practice.
Advisors may want to discourage sellers who want to delay their closings until official PPP loan forgiveness is approved as this could possibly take five months or longer to occur.
To date, no advisors with which I have spoken have observed practice acquisition lenders requiring sellers to place PPP loan amounts in escrow in order to fund deals for their borrowers. It seems likely that the primary reason to have a PPP equivalent loan amount go into escrow at closing would be to obtain PPP lenders’ prior written consent for practices to be sold.
Recasting, Normalization, Add-Backs
Unless the IRS reverses itself on the non-deductibility of expenses paid with PPP funds, such expenses would need to be considered as add-backs when recasting and normalizing profit and loss statements. Likewise, PPP monies received are not considered as income.
Don’t Play Attorney
It is a good idea for practice brokers to obtain copies of sellers/clients/PPP borrowers’ loan documents from sellers and provide this information to the attorneys involved on each deal. Let the attorneys decide what needs to happen, not the brokers or other advisors. In addition, a good pro-active step for brokers is to provide paperwork for buyers, their attorneys and lenders that specifies what changes have occurred in sellers’ practices as a result of Covid. Most practice acquisition lenders have forms with Covid related questions.
Conclusion
It is unknown if the SBA intentionally created ambiguity in their documents but whatever the case, we have to play the hand that we have been dealt. It is best to have PPP lenders sign off on all closings with all sellers who received PPP loans. Future updates from the SBA may change these conclusions.
Thanks goes out to my friend Monty Walker, CPA of Walker Business Advisory Services for providing much if the information contained in this report. https://www.walkeradvisory.com