Smaller home-based care agencies could be forced to close their doors as a result of the coronavirus, creating merger-and-acquisition opportunities for larger providers in the space. 

However, the Paycheck Protection Program (PPP) adds a new layer of complexity to some of those M&A opportunities, specifically if an acquisition target is the recipient of a PPP loan.

It’s unclear how many home-based care providers have received loans under the program, but about 13% of all loans issued so far have gone to businesses in the health care and social service spaces. Plus, dozens of home-based care providers have received larger PPP loans of $150,000 or more, according to data released earlier this week.

Before entering a deal with a PPP recipient, buyers should consider how many employees the home-based care agency has, what the PPP loan total is and when the loan will be forgiven, among other factors.

If buyers decide to proceed with the transaction after all that, there are also special considerations they should take into account when pricing the deal and creating the purchasing agreement, according to Philip Feigen, attorney and shareholder at the international law firm Polsinelli.

“You need to look at [if there were] any salary reductions or reductions in [full-time equivalents] (FTE) that would cause the borrower to not get full forgiveness so that you can price that out when you’re making an offer,” Feigen said.

He and his colleagues shared that tip and other advice during a recent Polsinelli webinar designed to help attendees navigate the M&A deal landscape when PPP loans are involved.

The PPP was born out of the CARES Act earlier this year as a way to help small to mid-sized businesses make payroll and finance other expenses amid the COVID-19 emergency. PPP loans are forgivable if recipients meet certain criteria, such as spending a certain amount of the money on payroll and keeping salaries relatively steady.

But if PPP recipients fail to meet those requirements, the Small Business Administration (SBA) could decide to audit them. That’s one reason buyers of PPP recipients should make sure to include certain covenants in their purchase agreements to protect themselves.

Polsinelli attorneys recommend buyers include covenants that require acquisition targets to do everything they can to ensure loan forgiveness, if they have yet to obtain it. That includes requiring them to use all funds as required under the CARES Act and to apply for loan forgiveness within a set period of time agreed upon by both parties. 

Additionally, buyers should include a provision requiring sellers to comply with any future audits, as well as to provide certain documentation, regardless.

“It’s important to make sure that the seller is maintaining all of their records for at least six years, or at the very least providing the buyer with a copy of all the records,” Sara Ainsworth, Polsinelli associate and attorney, said on the webinar. “The SBA has that six-year time period to come back and review all the loans, so it’s important to make sure that documentation is available.”

Agreements should also indemnify the buyer against PPP-related issues such as seller ineligibility, non-compliance with loan terms, audit investigations by SBA or taxes owed related to the CARES Act.

Escrow option

In a typical M&A deal, a buyer might get a representation and warranties insurance policy to further protect itself against losses that arise out of the buyer breaching certain agreement terms. But that’s less of an option in M&A deals where PPP loans are involved, Feigen said.

“It’s been our experience so far that none of the insurers are willing to do reps and warranties insurance with respect to the PPP loans, just because it’s so new that they can’t get their hands on what the potential liabilities are,” he said.

As an alternative, Feigen suggests setting up an escrow account in the amount of the PPP loan.

Once the loan is forgiven, the seller can have that money back. If it’s not, the money can help.

“To the extent [the PPP loan] is not forgiven, partially or all, then that becomes money that is either used to pay the loan back or goes back to the buyer, who would pay the loan back,” Feigen said. “A lot of sellers might be uncomfortable with that, and there’s a lot of potential liability related to it, but we’ve been seeing that used in transactions.”

Finally, Polsinelli attorneys say it’s important to lay out what will happen with any remaining PPP loans in M&A agreements.

The post How to Draft an M&A Agreement When PPP Loans Are Involved appeared first on Home Health Care News.