When the second round of PPP funding became available in January 2021, our firm saw a significant drop off in the number of clients seeking a second PPP loan. I view this is a positive indication that the first round did its job, and that we are in a different economic environment today than at this point last year. For the new lending round, businesses must demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. Logically, certifying that the loan is necessary is also going to be difficult for clients who have done fairly well. That said, a lot of businesses continue to struggle and the latest round of funding is going to really help them survive during this current phase. I’m seeing a notable split between businesses that are doing well, and those that are really hurting. For those in the latter category, M&A is a welcome and sound strategy to gain stability, or as an exit opportunity for founders.
The PPP continues to be extremely helpful to U.S. business, especially in Oregon. However, lingering uncertainty about the state of the economy, and around PPP forgiveness and the SBA’s lagging review of forgiveness applications, has affected the M&A market. Private equity firms have cooled down temporarily on deals as it’s too hard for them to predict what’s coming next and still act within their narrow investment parameters. On the other hand, there is steady movement in strategic acquisitions and sales. Companies are looking at the competitive landscape and seeing that it’s a good time to bulk up, or sell out. This is especially good news for founders who were ready to exit at the start of the pandemic and don’t have the runway for an effective succession plan.
It’s no surprise that an unresolved PPP loan presents a challenge when structuring an M&A deal. The PPP was put together very fast and guidance has been trickling out over the past year to fill holes. We’re getting more answers and consistent guidelines, but there is still ambiguity in the guidance, especially around tax and forgiveness. Last fall, I was working on a transaction that was ready to close on a Monday. On Friday, the SBA came out with new guidance that threw the transaction into disarray because it was missing one word that would have provided clarity for a critical element of the deal. Since we didn’t know when the next guidance would be released, we restructured the entire deal to get around the uncertainty. That’s the reality for M&A activity in the age of PPP!
Any business with a PPP loan that wants to get into the seller’s market needs to work through the ramifications of what it will mean for the transaction long before it gets to the table. Work with your advisors, get your seller’s diligence completed, and be ready to move fast when the opportunity arises.
Questions about M&A or PPP loans? Contact your primary Tonkon attorney.