Healthcare organizations that received Paycheck Protection Program funding are running into snags in their merger and acquisition talks, experts said.
The Small Business Administration-backed loans have drawn out some transactions when a borrower sells or transfers at least 20% of its stock or half its assets and has to get approval from the lender and/or the SBA, which has increased expenses. It could also derail deals.
“If there is a delay, it’s very likely that the transaction could end up canceled,” said Susan St. John, an attorney at the Florida Healthcare Law Firm. “The ultimate price of the deal is diluted, and parties may sour and walk away—the trust that you built is gone.”
One of St. John’s clients, many of which are small- to medium-sized healthcare organizations that fall under the 500-employee threshold required to qualify for the PPP funds, had to withdraw its state approval on its proposed merger because it didn’t satisfy the requirements involving PPP funds. It has completely stalled the transaction as the parties incur hundreds of thousands of dollars in additional expenses, she said.
“At this point we hope that we can get things moving again,” St. John said. “We are finding significant hurdles with big banks even though the loan was put in an escrow fund.”
Prior to an Oct. 2 update from the SBA, there wasn’t official guidance on how a company could sell its business if it had a PPP loan, which helped businesses cover payroll expenses and other overhead during the COVID-19 pandemic.
Some financially stable organizations opted to repay all of their COVID-19 relief funding, which could be in part related to streamlining acquisitions. Some larger healthcare companies with more than 500 employees tried to get around that threshold by borrowing through their subsidiaries, but that got a bit hairy including some bad press, said Jordan Shields, a managing partner of Juniper Advisory.
The recent update stipulated that borrowers could establish an interest-bearing escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan. The PPP recipient would also need to provide written notice with transaction documents to the SBA-approved bank that processed its loan as well as complete and submit its loan forgiveness application.
The vast majority of PPP borrowers are still waiting on banks or the SBA to sign off on their forgiveness applications, Shields said.
“The timing has taken longer than people hoped because it is such a massive program. There’s a lot of paperwork and a lot of large and small borrowers,” he said.
It's all subjective
Aside from the basic criteria needed to qualify for forgiveness, like using at least 60% of the loan for payroll, there may also be some subjectivity, said Art Van Buren, a shareholder with LBMC’s tax practice.
For instance, if a business can show that there was a reduction in the workforce due to a significant change in the business environment, they could still have their loan forgiven.
“But that is a very subjective term—what is significant? I argue that we don’t know the ‘true need’ (for these funds) yet. We don’t know what the long-term effects are,” said Van Buren, noting that there will be long-tail ramifications for people who lost their jobs and associated health insurance.
Other obstacles to consider
Managing the federal relief funding is one of several obstacles healthcare organizations face when trying to complete a transaction. Video conferencing is another limitation, which only goes so far when relatively unfamiliar parties come to the table. Workforces have had to adapt to operational upheavals caused by the pandemic.
Still, deals are getting done and just because a seller has a PPP loan, that is not deterring the process, said Lisa Nix, a shareholder and leader of LBMC’s transaction advisory services.
“However, more diligence is being done around the loan forgiveness application and status,” she said.
In the meantime
In the meantime, M&A experts advised PPP recipients to bring their lenders into the fold as soon as they are contemplating a sale or merger, as well as document the process in the letter of intent. They need to submit forgiveness applications as soon as possible. Organizations should also weight the tax implications, including how PPP loan forgiveness factors into their expense deductions.
“If you are not thinking about this when you start the process, you are already putting yourself behind,” St. John said.