Four M&A Considerations When Buying or Selling a PPP/EIDL-Recipient Business

If you were one of the businesses that took out a PPP or EIDL loan, you are not alone.  During the COVID-19 pandemic more than 11.8 million PPP loans were distributed worth over $800 billion.  With the economy recovering and things slowly starting to return to normal, more and more business are going to look to start acquiring other businesses or their assets, but in this CARES Act world, there are several new considerations you might not have had to worry about before.  The following are four things you will want to consider when looking to buy or sell a PPP or EIDL recipient business.

  1. Is it within twelve months since the business was granted the PPP?  If so, you will likely need to seek approval from the Small Business Administration (SBA).  SBA 7(a) loans, which includes PPP loans, mandates SBA approval for a “[c]hange in the ownership of a Borrower in the first 12 months after final disbursement.”
  2. Does this transaction trigger the “Present Effect Rule”?  The SBA’s “present effect” rule could potentially cause you to be in violation of your PPP or EIDL loan just by negotiating to buy/sell the business.  While the determination as to whether you are in violation of the loan agreement highly depends on where you are in your negotiations and how many employees would work at the company the prospective transaction would create, you don’t want to have your merger, purchase, or sale halted by the SBA due to the failure to consider this rule.
  3. Does the sale need to be approved by the SBA?  For some transactions, such as the situation described in Question 1, or where the PPP loan is being assumed and the original borrower released, or for an EIDL loan, you almost certainly need SBA approval.  Others may only require SBA notification; however, you and your attorney must evaluate which is needed before engaging in any M&A transaction.
  4. Will you need to notify the lender/bank of your loan of the sale? This answer is situationally dependent.  Some lenders used their own forms to document PPP loans; therefore, each loan has the potential to be governed by separate and different rules.  However, if you are required to seek lender approval and you do not, it may constitute a default of your loan.

In the time since the passing of the CARES Act, the SBA has been overwhelmed with requests.  With this in mind, if you are even considering a strategic transaction for your business, make sure you consult with an attorney to review the implications of your transaction before you attempt to go through with the transaction.  Otherwise, you could be left months waiting for approval, have your transaction denied outright, or be in default of your loan.

For assistance with any legal needs relating to selling your business or buying a business, or any of your business or estate planning needs, contact Fournier Legal Services at or (860) 670-3535.