Back in March, the future seemed hazy—to put it mildly. COVID-19 cases were spreading throughout the US, many states went on economic lockdown, and a huge number of small businesses suddenly found themselves without enough revenue to stay open—let alone pay their employees. In an effort to save the small businesses that support the US economy, the federal government passed the CARES Act, and with it, the Paycheck Protection Program (PPP). Now, nearly half a year later, small businesses are still in the middle of the PPP’s loan life. But the world of mergers and acquisitions (M&A) waits for no one, and clinic owners are asking themselves how the heck their PPP funding may affect the sale of their clinic (or the purchase of another one). So, let’s talk about it.

Before we proceed, please understand that I am not a lawyer—nor am I offering legal advice. When discussing PPP loans and business transactions, best practice is to seek official legal advice—specifically from a Certified Public Accountant (CPA), an attorney, and/or your PPP lender. 

The Paycheck Protection Program is uncharted territory. 

As I mentioned in the opening paragraph, the PPP is brand-stinkin’ new; it was created in late March via the CARES Act. Under the PPP, “Small businesses may take out Small Business Administration (SBA) loans for up to $10 million to cover payroll for employees earning up to $100,000 per year.” If borrowers use their loan solely on payroll and eligible operating costs and do not cut employee pay, then the loan principal is eligible for forgiveness. (Read more about the program here.)

Why will the PPP affect M&A transactions?

Most PPP borrowers are smack in the middle of their loan life. While they may have progressed past the forgiveness covered period (i.e., the time during which the PPP loan is expected to be applied to payroll expenses), many borrowers still have to apply for loan forgiveness and wait for a loan forgiveness review, or—if the business is not planning to wait for loan forgiveness—commence the repayment process. And according to this article on JD Supra, “there is no way to expedite review of a loan forgiveness application.”

In other words, most PPP loans are still very active, and these loans (and their forgiveness eligibility) can be affected by—or affect—an M&A transaction.

A PPP loan can affect a clinic’s selling price.

There are two ways that clinic buyers and sellers can view a PPP loan: as a clinic debt or as a potential future influx of cash. This perception of the loan can affect the terms of the M&A. 

If the loan is viewed as a debt, then the buyer might want to ask for a clinic purchase price adjustment that accounts for the unforgiven loan—plus interest. Alternatively, buyers may try to mitigate their risk by using an attorney’s escrow account. In this scenario, the buyer may ask the seller to put an amount equivalent to the PPP loan under the care of a third party (i.e., in escrow). If the PPP loan is forgiven, then the seller gets the money back. If the PPP loan is not forgiven, then the buyer gets that money.

On the other hand, a buyer may see a PPP loan (specifically, one that is likely to be forgiven) as a future cash boon. If this is the case—and the buyer is associated with a publicly traded company—then the buyer must be careful not to include PPP loan funds in any stockholder distribution. 

How do covenants play into this?

A legal covenant is basically a contract between two people (in this case, the buyer and seller) that acts as “a pledge to do or refrain from doing something.” Some legal bloggers (like the author of this article from The National Law Review) are recommending that business buyers enter into PPP-related covenants to help mitigate and manage their risk. That particular article recommends creating covenants that: 

  • Ask sellers to make their best effort to seek loan forgiveness, from appealing loan forgiveness denials to initiating legal action for partial loan forgiveness; 
  • Require sellers to retain all full-time employees and maintain all salaries and wages during the forgiveness covered period of the loan, and/or “cause the borrower to meet one of the safe harbors”;
  • Require sellers to fully comply with all PPP loan requirements; and/or 
  • Ask sellers to contribute to or manage the forgiveness application process. 

PPP loans are attached to their original applicants. 

This is where the specifics of the PPP loan get a little dicey for me, so please remember that I am not a lawyer, and that you should absolutely seek actual legal advice regarding this subject. That said, from what I understand, PPP loans cannot be passed off from clinic seller to buyer without consent from the SBA. Furthermore, when PPP loan recipients sell their businesses during the forgiveness covered period, the transition from paying many full-time employees to paying no full-time employees may strip those loans of forgiveness eligibility. 

Here’s what The National Law Review has to say about it: 

“It does not appear that lenders would be permitted under current SBA 7(a) regulations to consent to a transfer of assets by a PPP borrower without SBA consent. Even if a lender were to consent to an asset transaction, such a transaction during the forgiveness covered period would have a significantly detrimental impact on the borrower’s ability to obtain forgiveness because the borrower would, as of closing, cease incurring forgivable expenses and would also suffer a reduction (to zero in most cases) in its number of full-time equivalent (FTE) employees, thus reducing (if not eliminating) the forgivable amount of its PPP loan. Theoretically, the parties could enter into some sort of TSA whereby the borrower would retain its employees (and the related expenses) for the purpose of providing services to [the] buyer, but this may be impractical and render lender consent to the transaction even more unlikely.”

PPP loan recipients need to safeguard their loan forgiveness eligibility during M&A transactions. 

While the language of the CARES Act and the PPP doesn’t prevent participating business owners from selling their businesses, the actual loan lender (e.g., a local bank) may have included restrictive verbiage inside the loan documents. For instance, “Some PPP loan documents might require the lender’s consent before entering into a transaction involving the sale of the business or substantially all of its assets.” In other words, you may need to notify your bank—or even get its permission—before selling your clinic in order to avoid losing PPP loan forgiveness eligibility.

So, if you’re selling your clinic, be sure to review your PPP loan documents and reach out to your lender, a CPA, or an attorney to determine your next steps. 

How can a buyer help a seller secure PPP loan forgiveness?

It may go without saying, but if a seller is attempting to secure loan forgiveness after a clinic sale, then the seller must have:

  • All of the relevant documentation needed to apply for forgiveness, or 
  • Access to relevant documentation as necessary after the sale. 

PPP loans have tax implications.

Consider the Employee Retention Credit (ERC): “a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.” It was another CARES Act initiative intended to keep businesses afloat during the pandemic. However, the IRS has explicitly stated that recipients of PPP loans (especially loans that are forgiven) are not eligible for the ERC. The one exception is PPP recipients who paid their loan in full by May 18, 2020. 

So, what does that mean for a clinic buyer? Well, The National Law Review says that these ERC restrictions also apply to affiliates of PPP recipients—for example, a clinic purchaser. The above-linked article goes one step further to explain this situation: 

“For private equity sponsors and their portfolio companies, it appears that all portfolio companies of the investing fund could be ‘infected’ by the acquisition of such a PPP borrower.” 

It is possible to avoid these restrictions, but the business buyer would have to acquire the seller’s clinic via an asset deal, “which may result in additional transaction costs and create adverse seller tax consequences.”

What about exemptions?

According to this article from Sensiba San Filippo, the IRS has explicitly stated that expenses paid via PPP loan capital are non-deductible. This is because the PPP loans themselves are considered tax-exempt income, and the IRS wants to avoid overlapping tax benefits. 


Still have questions about the PPP or how it’ll affect your future M&A deals? Feel free to ask them below, and our team will do its best to find you an answer. Remember, though, that we are not lawyers, and best practice is to seek official legal advice, specifically from a CPA, an attorney, and/or your PPP lender.