How could practice sales be affected by sellers who received paycheck protection loans?
by J. Robert Brooks, CBI, CEPA
Did you know that debt could be an asset for practice owners who received forgivable Paycheck Protection Program (PPP) loans? According to a survey of dental practice owners/borrowers with one of the country’s largest health care lenders, more than 95% of respondents participated in the program. By mid-July, more than 90% of respondents were already well positioned to receive PPP loan forgiveness.
This sounds great, but if you’re a practice owner planning to sell your practice before receiving official loan forgiveness from the Small Business Administration (SBA), there are hoops to jump through. According to the PPP loan default provisions, practice owners wanting to sell their practices before receiving official SBA forgiveness must secure written approval from the PPP borrower’s local lender through which the borrower’s loan applications were submitted and approved. The CARES Act Section 1102 Lender Agreement defines the lender as a federally insured depository institution or credit union, not the SBA. Here is a default provision of the PPP Note: “The borrower reorganizes, merges, consolidates or otherwise changes ownership or business structure without the lender’s prior written consent.”
Navigating a sale
Unfortunately, without SBA guidance, what happens if a default occurs is unknown. If borrowers in default later receive loan forgiveness, default may be a nonissue. But if practice sellers haven’t received written approval from their lenders or forgiveness by the SBA, then at minimum, borrowers deemed to be in default would need to repay their PPP loans with interest, and more serious consequences could occur.
Some bank presidents will not want to stick their necks out by giving borrowers written permission to sell their practices before receiving SBA forgiveness. If they do, that’s great—just get their signatures and be done with it. According to practice acquisition lender Bill Murray of Lendeavor, in some closings, the sellers gave notice to their PPP lenders that they were selling their practices and the lenders said nothing. But this is not what the PPP note states; it requires prior written consent.
If there is pushback from a PPP lender that’s reluctant to give prior written consent, then a practice seller may need to place an amount equivalent to the PPP loan in escrow at closing to cover any future loan repayment liability. It seems reasonable that if a PPP lender received documentation of such until a final determination of the borrower’s loan forgiveness status is determined, the lender would give prior written consent to the sale of a practice.
Stock sales of practices are treated differently, but if practice buyers are purchasing practices through asset sales—through which 99% of all practices are purchased—then buyers should not have exposure to risk associated with PPP loans granted to sellers. According to Monty Walker, CPA, lead subject matter expert for the International Business Brokers Association (IBBA), to accommodate sellers so that some deals can go to closing, buyers may agree to hire a seller’s management company that retains a seller’s employees until PPP loan forgiveness criteria have been satisfied.
In a recent IBBA-hosted webinar, Gavin Shea, Wells Fargo national director for health care lending, shared that buyers who use SBA loans to fund practice purchases shouldn’t be affected when buying a practice that received PPP money.
It is unknown if the SBA intentionally created ambiguity in its documents, but practice sellers, buyers and their advisers must play the hand that they’ve been dealt. It is best to have PPP lenders sign off on all closings with all sellers who received PPP loans prior to official forgiveness. Updates from the SBA may change these conclusions.