Buying or Selling a Business: How PPP Loans Can Affect You

On March 27, 2020, Congress signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act introduced the Paycheck Protection Program (“PPP”), which since last year has distributed approximately $900 billion in forgivable loans to businesses with the goal of preventing job loss and failure due to losses caused by the COVID-19 pandemic.

While PPP loans can benefit a business, the ramifications of obtaining a PPP loan should be considered. If you are either purchasing or selling a business that has received a PPP loan, the status of the PPP loan may prevent or delay the transaction.

Under the CARES Act, if there is an intended transaction or multiple transactions totaling at least 20 percent of a business’ ownership, or 50 percent of its assets, certain conditions are created that must be satisfied prior to closing on the transaction(s).

Prior to completing a stock or asset sale, the business that has obtained the PPP loan must either:

  1. File for and obtain forgiveness of the PPP Loan prior to closing; or
  2. If the business is unable to obtain forgiveness of the PPP loan prior to closing, the business must submit funds to the PPP Lender equal to the outstanding balance of the PPP loan, to be held by the lender in an interest-bearing escrow account.

Further, and more significantly, approval from the Small Business Associations (“SBA”) may be required in order for the change of ownership to take place.

Accordingly, if you plan on buying a business, whether or not the business has acquired a PPP loan should be considered. If the business still has an outstanding PPP loan, it may elongate the purchase process and complicate the sale. Retaining knowledgeable legal counsel to assist in the purchase or sale of your business can make sure that the transaction will be smooth and you are protected from future financial or legal ramifications.

If you or your business are about to enter into a share purchase or asset acquisition of another entity, please contact Anthony Iacocca or Rajvir Goomer at (732) 545-4717 and we can guide you through the process.