PPP Issues When Buying or Selling A Dental Practice
Jordan Uditsky • December 1, 2020
As was the case for small businesses in almost every sector of the economy, the Paycheck Protection Program (PPP) provided a desperately needed lifeline for dental practices temporarily shuttered by the COVID-19 pandemic. These funds covered payroll, rent, mortgage payments, and other costs. One of the program’s most important and attractive features is that loans were completely forgivable as long as the borrower used the funds as allowed and satisfied other requirements.
But as critical as PPP loans have been, they present new and novel challenges for those seeking to buy or sell a dental practice that received funds from the program. Parties to a transaction need to consider how to account for the proceeds, ensure that forgiveness has been or will be obtained, and allocate responsibility liability for any unforgiven loans.
Recent SBA Guidance
As the U.S. Small Business Administration (SBA) manages the PPP program, following its guidance on how to treat PPP loans in the context of the sale or purchase of a practice is critical. For months after the program's launch, parties were flying blind as to what they needed to do to avoid problems with obtaining forgiveness on PPP loans and other issues that arise in a practice acquisition.
To clarify many of these issues, the Small Business Administration (SBA) issued guidance on Oct. 2
that outlines the procedures to follow when there is a change in a borrower's ownership.
What Constitutes a "Change In Ownership" for Purposes of PPP Obligations
Not all ownership transactions raise PPP issues. For purposes of the PPP, a "change of ownership" occurs when:
- At least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly-traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity.
- The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions.
- A PPP borrower merges with or into another entity.
Continued Obligations of a PPP Borrower
The SBA's guidance clarifies that PPP borrowers remain liable for all repayment, certification, and documentation requirements related to the loan. Specifically, a borrower remains responsible for the following regardless of a change in ownership:
- Performance of all obligations under the PPP loan.
- The certifications made in connection with the PPP loan application, including the certification of economic necessity.
- Obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the "PPP Lender" in this Notice) or to SBA upon request.
- Compliance with all other applicable PPP requirements.
Notifying Lenders of Change in Ownership
Before closing any transaction that constitutes a change of ownership as described above, the PPP borrower must notify its PPP lender in writing of the contemplated transaction. The borrower must also provide the lender with a copy of the proposed agreements or other documents that would execute the proposed deal.
When SBA Approval Is Needed Before a Change of Ownership
Depending on the loan status or the nature of the transaction, the SBA may need to approve a change of ownership before it is consummated.
If the borrower has satisfied its PPP loan obligations, there are no restrictions on ownership change. This is the case when the borrower has repaid the note in full or has completed the loan forgiveness process and repaid any remaining balance on the loan.
For transactions closing before the borrower has satisfied its PPP loan obligations, a PPP lender may permit the transaction to proceed without prior SBA approval if:
- The sales or other transfers involve 50 percent or less of the borrower's common stock or other ownership interest.
- The sales or other transfers involve more than 50 percent of the common stock, other ownership interest, or assets of the borrower and the borrower:
- Submits a loan forgiveness application to its lender detailing its use of all PPP loan proceeds, together with supporting documentation.
- Establishes an interest-bearing escrow account controlled by the lender with funds equal to the PPP loan's outstanding balance.
Prior SBA approval is required for any changes in ownership not listed above. Much of the responsibility for obtaining that approval falls on the PPP lender, as outlined in the SBA's guidance.
For asset sales requiring SBA approval, the purchasing entity must assume all of the borrower's obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.
Considering a Dental Practice Sale or Acquisition Involving a PPP Loan? Call the Dental Practice Lawyers at Grogan, Hesse & Uditsky Today.
The SBA’s guidance does provide clarity on many aspects of PPP loan treatment during the purchase or sale of a dental practice. However, integrating these loans into the transaction and pending forgiveness issues make it even more critical that parties engage in comprehensive due diligence and prepare meticulous documentation for such a consequential transaction.
At Grogan, Hesse & Uditsky, P.C., we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.
Please call us at (630) 833-5533 or contact us
online to arrange for your free initial consultation.
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