Mitigating forgiven PPP loan risk

December 28, 2022

by a professional in Nashville, TN, USA

I have been working on a few transactions in the staffing industry and have noticed a trend - owners keeping 90%+ of forgiven PPP funds in the form of distributions or balance sheet cash through a cash free, debt free structure. What are the best ways to mitigate risk, specifically that tied to an audit by the SBA / IRS? Are there ways to include a personal guarantee within the purchase agreement, etc? The challenge with holdbacks is that sellers are averse to them and then audit window is typically much longer than the holdback period. Thanks in advance for any insight around this!

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Reply by a searcher
from IE Business School in Seattle, WA, USA

This is actually not that complicated, as splitting liabilities is fairly common in purchase contracts. On my deal, in the purchase contract we specifically called out any potential liability or payback of the PPP loan (& the 2nd one!) as being 100% Seller responsibility, no matter if/when the IRS decides to make an issue out of it. Even in stock purchases there are certain liabilities that will be called out as not carrying over to the Buyer, so just add this as one of them (you may also want to do this for income tax liability, since many small business owners take liberties that won't survive a thorough audit). Now, in practice there will be some risk or headache involved if the IRS finds an issue. They will go after the entity, rather than a person, & they don't care who owns it now vs. who did before. In my case we also called out in the Seller note (which has a 5 year term) that we have the option of not paying the note if the Seller doesn't cover one of these type liabilities. You might have to sue the Seller to get them to pay, so your bigger concern is will the Seller still be alive in a few years & what will their financial situation look like. We also added clauses that would make it painful for the Sellers to renege on the liabilities that we both agreed are theirs... Yes, it could be a short-term cashflow issue if you have to pay the IRS right now vs eliminating some future Seller note payments, but my point is you have options with the purchase contract & note documents.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

There are successor liabilities even in an Asset purchase (e.g. payroll tax, environmental). I suspect, as a non-lawyer, that the PPP liability falls into successor liability. However, if the PPP application data is correct (for getting the loan and for forgiveness) then there is no risk. If you continue to remain concerned about this risk, then include this item in RWI.

Even if you were to get the excess cash resulting from PPP, the cost associated with false PPP if proven, will be seriously more than the PPP amount.

In my opinion, a typical business purchase has many more, and material, risk items from a buyer perspective than the PPP issue mentioned here.

I have been involved with Stock and Asset transactions with forgiven PPP. Buyer represented by highly experienced accounting firms and law firms. The risk of forgiven PPP has not come up. In one case PPP loan was pending forgiveness. That was handled through escrow.

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