The Covid-19 pandemic has disrupted most economic sectors worldwide prompting governments to enact emergency stimulus measures to help businesses navigate the situation. In March 2020, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, among other economic stimulus measures, providing targeted relief to small businesses through its Paycheck Protection Program (PPP).

In light of this development, potential buyers in M&A transactions must factor into their negotiation and due diligence process the potential impact of these PPP loans when evaluating acquisition targets. This article discusses some of the main considerations that buyers should keep in mind in evaluating targets with outstanding PPP loan balances.

Conducting Due Diligence on a PPP Borrower

Given that PPP loans introduce additional potential risks in an M&A transaction, buyers should include additional information requests specific to the PPP loan as part of their review process.

As a starting point, it is important for buyers to understand the borrower’s requirements and obligations associated with PPP loans. For a borrower to have qualified for such a loan, the CARES Act required it to satisfy two main conditions. First, the business must qualify as a “small business;” and second, it must make certain certifications.

For the first requirement, a business qualifies as a “small business” if it has 500 or fewer employees. The Necessity Certification is a good-faith attestation from borrowers on the PPP application stating that the loan was needed to continue business operations since drawing on other credit facilities would be detrimental to the business. It should be noted that loan forgiveness requirements do not contain a requirement for re-certification, but the SBA will determine the borrower’s eligibility for forgiveness based on the rules available at the time of the application.

Buyers seeking to acquire a target company that applied for a PPP loan will need to consider the ability of the target to make the Necessity Certification—both before and after the transaction closes. Keep in mind that access to liquidity and capital from the buyer and its affiliates will need to be assessed in determining whether the applicant can make the Necessity Certification. Also, according to the SBA’s affiliation rules, a buyer that acquires a controlling interest in a PPP loan applicant will be treated as an affiliate of the applicant. The implication is that the buyer will need to aggregate employees and revenues to determine if the applicant exceeds the size standard for loan eligibility.

For acquisition targets that have already obtained a PPP loan, it is important to analyze several factors. First, the target’s financial and payroll records must be reviewed to confirm that the company accurately calculated the loan amount and that the loan will be eligible for forgiveness. Second, the buyer must assess the target’s need for a PPP loan, particularly in relation to operations, cash flows and working capital. Finally, the assessment must focus on the compliance with the CARES Act and SBA rules regarding the PPP loan, including the validity of the certification made during the application.

Also, it is important to note that a buyer faces some risk from potential liabilities even if the PPP loan is repaid at closing. The SBA has stated that PPP loans for $2 million or greater are subject to audits for a six-year period, so the target could be subject to criminal or civil penalties if it is determined that its loan application or Necessity Certification contained false or misleading information.

Dealing with Outstanding PPP Loan Balances

An important consideration involves whether the PPP loan should be repaid prior to an M&A transaction. Some buyers may insist on repayment of a PPP loan prior to or at closing to disassociate themselves from the PPP.

The decision to repay the loan depends on what the PPP lender may require. Diligence should be done to confirm the nature of any change of control restrictions under the loan documents governing a particular PPP loan.

Buyers will likely insist on treating PPP loan balances as reductions to the purchase price akin to other indebtedness. Sellers should in turn, to the extent possible, seek to preserve the potential forgiveness amount or otherwise be compensated for the portion of the loan actually forgiven.

Current SBA guidance on PPP loan forgiveness references a 90-day period for the SBA to approve. This 90-day period is in addition to the 60-day period a PPP lender has to approve the forgiveness application and disburse the loan forgiveness amount. For some buyers, this 150-day period will likely have a chilling effect on the seller’s argument to delay closing until after the loan is forgiven.

Lastly, whether a buyer’s valuation of a target company hinges on the forgiveness of an outstanding PPP loan, or a buyer otherwise is amenable to leaving an outstanding PPP loan in place post-transaction, creates several options: (1) wait to execute until the loan is forgiven, (2) make forgiveness a condition for closing, or (3) keep the loan in place and adjust the purchase price with the buyer placing the loan amount in escrow with the PPP lender. Any loan amount not forgiven would be paid to the lender to satisfy the outstanding loan.

PPP Loan Forgiveness Issues Arising From a Change In Control

There are two important issues to consider involving loan forgiveness in an M&A transaction: required consents and tax implications.

Regarding required consents, PPP loans may require lender and/or SBA approval of the transaction. To determine whether any such consents are required, buyers should carefully examine the PPP loan documents including the underlying promissory note as well as the SBA’s guidelines. As previously stated, there is a potential 150-day waiting period to obtain required consents and this needs to be factored into the decision-making process.

With regard to tax implications, it is important to note that targets taking advantage of PPP loan forgiveness may owe more federal income tax than they expected, triggering several considerations for buyers in due diligence.

The CARES Act provides that the amount of the forgiven PPP loan is excluded from gross income. But the IRS has taken the position in Notice 2020-32 that otherwise deductible expenses paid using the proceeds of forgiven PPP loans are not deductible. The net effect of this position is to place borrowers in the same economic position as if the forgiven PPP loan were taxable. Buyers should thus confirm that targets have properly accounted for the IRS’s position to avoid possible penalties and interest for underpaid taxes.

In addition, targets may be required to file an amended tax return once the actual amount of PPP loan forgiveness is finally determined.  For example, if the target does not claim a deduction for an expense paid for with PPP loan proceeds (under the assumption that the PPP loan will be forgiven) and if the forgiven amount is ultimately different than estimated, the target may need to amend its return accordingly. Buyers may seek to review any such returns and should otherwise be aware of the need to file those such returns at the appropriate time.


Emergency economic measures enacted by the U.S. Congress to assist businesses in dealing with the disruptions created by the pandemic require that participants in M&A transactions take additional steps to minimize surprises post-closing.

Both buyers and sellers should carefully review the SBA procedural guidance to familiarize themselves with the steps to take during a change in control transaction. This will not only ensure proper compliance but will avoid errors that could slow or prevent the closing process.

Some of the key points to keep in mind in contemplating an M&A transaction include:

  • Should a change in ownership occur, the PPP borrower is still responsible for all certifications.
  • The borrower must notify the PPP lender in writing of the contemplated transaction.
  • If the PPP note is not fully satisfied prior to the closing, certain transactions may require approval and establishment of an escrow controlled by the lender.
  • Sellers may be required to file an amended tax return once the actual amount of PPP loan forgiveness is finally determined.