The Potential Impact of PPP Loans on M&A Deals

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Among other things, the CARES Act established the Paycheck Protection Program (PPP) through the Small Business Administration (SBA), which provided potentially forgivable loans to eligible small businesses facing economic hardship, largely for the purpose of retaining U.S. employees on their payroll during the COVID-19 pandemic.

Given the haste with which the PPP was implemented, two factors may impact the forgivability of the PPP loan and ultimately affect M&A deals:

  • PPP applicants may not have met the eligibility criteria for their receipt of a PPP loan.
  • Subsequent to receipt of the funding, the PPP funds were not administered by the PPP loan recipient in accordance with the requirements of the program.

For M&A transactions in which buyers or sellers hold PPP loans, there are ways to mitigate the risk through diligence and appropriate representations, warranties, covenants and special indemnification.

First, identify the potential risks.

To ensure all parties to the M&A transaction are protected, the potential risks involved with respect to PPP funding need to be identified during the due diligence phase of the transaction, adding new diligence criteria focused on the PPP loan and loan process. This should include a review of the PPP promissory note to evaluate terms, conditions and consent requirements.

Allocate risk appropriately.

Depending upon the risks identified, the stock or asset purchase transaction documents should be drafted with a focus on allocating risk appropriately between the parties, such as by incorporating representations, warranties and special indemnities to protect the buyer or by adding requirements for buyer cooperation in the event loan forgiveness is not achieved prior to the closing of the transaction.

Given the importance of forgivability for PPP loans and potential exposure to both parties, the following matters and options should be considered when contemplating a merger or acquisition transaction involving a PPP or other government loan program implemented in response to COVID-19:

  • SBA consent is required before a borrower can effect a “change of ownership” within 12 months of the final disbursement of an SBA 7(a) loan, including PPP loans.

  • Although the SBA regulations do not expressly address asset acquisitions, the SBA has recently been informing PPP lenders that the SBA does not distinguish between an asset acquisition and a “change of ownership” and therefore will expect PPP lenders to obtain SBA consent prior to approving asset purchase transactions.

  • For those transactions that involve a target company that has already received a PPP loan, buyer and seller need to consider whether to repay the PPP loan at closing or keep the PPP loan outstanding post-closing. Take into consideration that the PPP lender may dictate whether the PPP loan will need to be repaid or if the loan may remain in place post-closing.

    1. If the buyer requires the seller to repay the loan at or prior to closing, the seller will not receive the benefits of loan forgiveness.

    2. In the alternative, the buyer and seller may opt to delay closing until the seller has received loan forgiveness. However, this process can take up to 150 days.

    3. If buyer and seller do not want to delay the deal for loan forgiveness and opt to keep the PPP loan in place post-closing (after obtaining any required consent or waiver from the PPP lender and the SBA), then a future forgiveness determination may be made with an appropriate adjustment to the purchase price.

  • If the parties keep the PPP loan in place post-closing, options include:

    1. A buyer covenant to remit forgiveness amount, when received

    2. A buyer escrowing the potential forgiveness amount and remitting to seller when the buyer receives a favorable forgiveness determination

    3. A provision requiring a post-closing adjustment upon receipt of the forgiveness determination

  • Regardless of whether the parties opt to repay, delay the transaction or keep the PPP loan in place post-closing, the existence of a PPP loan heightens the due diligence requirements for the buyer, including diligence relating to the target’s eligibility for the PPP loan, calculation of the loan amount, the necessity certification, and review of borrower documentation supporting loan expenditures for permitted uses only.

  • Seller / PPP borrower representations and warranties should be added to the acquisition agreement to allocate the risk for breaches or inaccuracies to the seller. These include:

    1. Disclosure of receipt of the PPP loan or loans from any other governmental program

    2. Confirmation of eligibility

    3. Confirmation of the truth and accuracy of the certifications

    4. Compliance with the terms of the PPP program and whether any officers or employees of the target have been debarred from engaging in government contracting activities.

  • From the buyer’s perspective, a specific indemnification provision should address the PPP loan specifically. It should include indemnity coverage for non-compliance with the terms of the PPP loan, treating PPP representations as fundamental, providing for consequential or special damages (including coverage for civil or criminal penalties) and adjustment of the cap (if any) for recoverable damages relating to the specific PPP indemnity.

  • Other considerations include additional covenants to protect the process of forgiveness, control of audits over the 6-year audit period for PPP loans and future assurances for cooperation.

Despite the uncertainties, the presence of a PPP loan should not prevent good deals from closing. Proper due diligence and risk allocation can ensure a fair and timely transaction for all parties involved.

To learn more, contact Valerie Barton at or (404) 961-7616.


Moye White