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PPP Loans (Part 1):  PPP Loans in a Transaction

By Benjamin M. Cooke, Esq. and Julie A. Vaccarelli, Esq.

How does a PPP loan that has not yet been forgiven get handled in a mergers and acquisitions (M&A) deal?

"It depends."  Most clients are familiar with this phrase from their lawyer.  In most cases the vague or uncommitted response is necessitated by the uncertainty of how the facts might be judged or interpreted in a given situation.  Clients generally want more specificity and who could blame them.

In the case of a lender's treatment of a Paycheck Protection Program (PPP) loan in an M&A transaction, it depends because the lenders are uncertain about how to best mitigate the risk that a PPP loan will ultimately be forgiven or not.

If you attended our Firm's webinar in May, you will recall that we spent some time dealing with the necessary bank consent to a transaction when the seller is also the borrower of a PPP loan.  In either the case of the sale of equity (i.e a stock deal) or a sale of substantially all of the borrower's assets (i.e. an asset deal), the loan covenants to the PPP loan will require bank consent or, alternatively, that the sale might constitute an outright event of default accelerating the full loan balance.  In May we recommended that borrower/seller engage with the lender early in the sale process to obtain the necessary bank consent on the PPP loan.  That advice continues to hold true.

In our recent transaction experience, lenders have taken extremely varied positions on the treatment of a PPP loan balance prior to the application for forgiveness.  Based on the most recent guidance, the Small Business Administration (SBA) forgiveness application must be made within 10 months of the end of the covered period.  The covered period can be up to 24 weeks, so the issue of PPP forgiveness is likely to survive any deal proceeding in the current environment.  During that interim period prior to forgiveness, lenders have taken the following positions:

  1. pay the PPP loan balance in full at transaction closing,
  2. place some percentage of the PPP loan balance in escrow pending the application and grant of loan forgiveness, or
  3. grant full consent to the transaction permitting the borrower/seller to submit the forgiveness application in due course following the transaction closing.

It is remarkably difficult to advise clients given this landscape, but the fundamental remains the same – engage with your lender early in any transaction process.

Even in internal shareholder transactions, the PPP loan is a key variable.  Some have argued that the PPP loan ought to be factored into the valuation as long-term debt.  While it may be booked as a long-term liability, the terms of the forgivable PPP loan suggest that it should be treated differently.  Even if the PPP loan is not considered long-term debt, it is important to handle the issue in any internal buyout and ensure that the lender is advise of the transaction and consents to it if required in the PPP loan agreement.  Our recent experience has suggested that the non-deductibility of PPP permitted expenses needs consideration when working through any shareholder transaction.

In any case, working with your lender remains a key.  Our M&A deal team has worked on several recent deals where this issue has become a key gating item in negotiations and a key hurdle to closing.  If you have questions about the process, please contact your counsel at WHP to examine options.


This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.

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