Paycheck Protection Loans, M&A, and Start-Ups

/NEWS

At first, it would appear M&A and start-ups have very little to do with SBA's Paycheck Protection Program (PPP). However, the complexity of a business's life cycle can prove to be a legislative challenge. SBA provided expanded guidance in an Interim Final Ruling (IFR) on the changes to PPP in the Consolidated Appropriations Act, 2021. Under the modified program, a borrower may obtain a second loan if they satisfy certain requirements. One of those requirements is that the borrower must demonstrate a 25% reduction of gross receipts in any one quarter in 2020 as compared to the same quarter in 2019. This raises the logical question, if a company has been recently acquired, sold, or started in 2019 or 2020, how does a borrower determine the 25% reduction in gross receipts?

Acquired or Sold a Company in 2020

If a borrower is applying for a second draw, the Paycheck Protection Program IFR provides additional rules on how to determine the reduction in gross receipts for a borrower who has made an acquisitions or disposition during 2019 or 2020. The IFR states the following:

• Companies acquired during 2020 are treated as if they were owned by the buyer during "the entire period of measurement" (i.e., all relevant quarters of 2019 - 2020); and
• Receipts from entities sold during 2019 OR 2020 are excluded for the "entire period of measurement."

The IFR provides additional guidance on the treatment of equity acquisitions. In these situations, the borrower would include the revenue from the acquired business unless it is a "segregable division." Under this scenario, the gross receipts of the division are not included for periods prior to the acquisition. However, this does not appear to exclude revenue acquired during 2020 from an asset acquisition, except if the borrower acquired the assets into a newly formed acquisition or affiliate.

For borrowers who have sold a "segregable division" during 2020, they must "continue to include the receipts of the division that was sold."

A New Company in 2019

If a company was not formed in 2019, but was in business by February 15, 2020, the company should compare the 2nd, 3rd, or 4th quarter of 2020 to the 1st quarter of 2020 to determine if the business meets the 25% reduction in gross receipts.

For addition assistance related the Paycheck Protection Program and M&A, please contact Liz Roth (lroth@peasecapital.com) or Chuck Fenske (cfenske@peasecapital.com).