Are you considering the sale of your company, but there is still an existing “Unforgiven” Paycheck Protection Program (PPP) Loan issued by the Federal Government to your business? Could you sell your company with an existing PPP Loan? Would the bank that issued the PPP loan allow you to sell? Would the lender who is issuing the loan for the acquisition of the business fund the deal with an existing PPP Loan? Our team of advisors has recent experience in this scenario, selling companies with an existing “Unforgiven” PPP Loan in place.
It’s important to first understand what a PPP Loan is. It is essentially an unsecured debt issued by the Federal Government in 2020 through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers. The loan proceeds may be used to cover payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the business keeps its employee counts and employee wages stable. However, as of the time of this article, most PPP Loans have yet to be forgiven. How does that impact the sale of your company?
When the Federal Government initially passed the CARES Act, there was very little guidance in terms of the treatment, repayment, or forgiveness of these loans, particularly in the event the business was to be sold. As many businesses began to go to market in the latter part of 2020, there was sufficient pressure in the market, including deals we were working on, to force the Federal Government to address this issue.
Here’s the latest guidance. A PPP borrower may sell their business during the period when the PPP loan is outstanding and before forgiveness has been granted. In this case, proceeds of the sale in an amount equaling the outstanding PPP loan balance must be placed in escrow with the PPP Lender to cover the outstanding balance of the PPP loan if the loan isn’t forgiven. Seller and buyer must work with the lender (or the Lender that is servicing the PPP loan) to have the buyer assume the PPP loan and continue to use any remaining PPP loan proceeds for payroll costs and other eligible payments of mortgage interest, rent, and/or utilities in accordance with PPP requirements. Once all requirements have been fulfilled, and the PPP Loan has been forgiven, then the escrow balance is released by the PPP Loan issuer, to the seller.
A forgiven PPP Loan is not considered taxable income and Additionally, with respect to the lenders reporting cancellation of debt (Form 1099-C), IRS announcement 2020-12 published on September 22, 2020, notifies lenders that they should not file information returns or furnish payee statements to report the amount of qualifying forgiveness with respect to covered loans made under the Paycheck Protection Program (PPP). Feel free to contact Trinity Transaction Advisory for additional guidance.