As we navigate this uncertain business environment created by COVID-19, both sellers and buyers have to add a few considerations if they’re contemplating an M&A transaction. The question of the PPP loan is certainly one of the elephants in the room. How does it affect an asset’s valuation? How can sellers and buyers protect themselves when entering these transactions? Don’t miss out on this episode, where M&A experts Tad Render of Miller, Cooper & Co., Ltd. and your host, Domenic Rinaldi, discuss in detail some of the most important things buyers and sellers should take into account before striking a deal in these uncertain times. Contemplating a sale? Planning on buying an asset out? Now more than ever, you may need to sit down with all your advisors before you proceed.

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COVID-19 Valuations And The Effect Of PPP Loans On M&A Transactions With Tad Render

I’m happy to have Tad Render back on the show. Tad is the Head of the Transaction Services Practice at Miller Cooper. It’s the tenth largest accounting firm in Chicago. Tad and I spent some time talking about business financials and valuations during this COVID period and how buyers and sellers can best navigate this chaotic period. We also discussed PPP loans, the impact they’re having on M&A transactions, and how buyers and sellers can protect themselves. Tad and his team are M&A experts, and Tad is a wealth of knowledge. You won’t want to miss this episode. Before we get into the interview, please head over to K2 Adviser and take our free seller or buyer assessment. These assessments will help you understand how ready you are for an acquisition or sale. Being prepared is critical to ensuring that you maximize returns and minimize risks. Thank you for being here.

We have back with us Tad Render, who is the Head of the Transaction Services Practice at Miller Cooper, which is a local Chicago CPA firm. Tad, welcome.

Thank you, Domenic. I appreciate it.

You are one busy guy I would imagine.

It has been hectic.

We’ve got a lot to cover. We want to cover what’s happening with people and their financials and what you’re seeing. We want to touch on PPP and what’s happening there. Why don’t we start at a high level load? What are you seeing in the marketplace from a financial perspective? What’s happening with valuations? What are the banks saying? Give us your view of that.

We’re seeing a wide range of responses to the Coronavirus pandemic. You would be hard-pressed to find a business not impacted whether it’s positive or negative from the pandemic. We thought in our practice transaction flow was going to drop off a cliff. It hasn’t. People are still out there looking. There are still a lot of motivated sellers. A lot of deals are put on pause in a lot of situations. The earnings of the underlying business have deteriorated. Both buyers and lenders are eager to see what’s the rebound effect. Unfortunately, that rebound hasn’t occurred for a lot the industry’s hit hardest by the pandemic.

We’re seeing the same thing. We don’t know when that rebound is going to happen. Will it be fall, will it be the end of 2020 or will it be 2021? We’ve got a lot of sellers coming to us and asking us, how do they value their business during this period of time? It’s hard because if they were impacted and they haven’t rebounded, you’re in a limbo state.

You are. Unless a seller wants to take a significant seller note or shift a significant portion of the consideration to an earn-out, they may be well advised to put a pause on the process and let that rebound occur. When we look to do our quality of earnings analysis and the lender is looking at the historical earnings, they want to see a trailing twelve-month period. If we’re including March through June in that TTM, the numbers may not look the best. To the extent we can get a rebound effect and get the earnings back up or accurately quantify some of the impacts to the P&L that the pandemics had on the business, it may be best served to hold off of it.

You’re still faced with the issue of what does rebound look like? Unless you have a picture of that, it’s going to be hard to probably get a negotiation done with a buyer. Unless like you said, there’s a significant earn-out or seller note. Even then, what are the metrics? You don’t know what a rebound could look like and in what timeframe.

There are lender considerations involved on how much leverage that the business can support at the current earnings level.

You and I were talking. We have almost the opposite situation happening for some of the businesses that we’re seeing that are going gangbusters, where they actually have been a benefactor of COVID. Maybe they’ve doubled or tripled in size. They’re looking for valuations at that new level, but it’s probably hard to know if that’s the new normal for them. The answer is it may not be.

We’re helping a buyer evaluate a landscape contractor and they’ve had their April and May record and likely June record in the history of the company. Everyone’s staying at home. No one’s traveling. Instead of taking that vacation, they want to redo the backyard and they can’t keep up with volume. The backlog’s growing. It’s going to be a great 2020 for this contractor. I don’t know if that’s going to continue into 2021. We’re having discussions on valuation in that situation.

You would be hard-pressed to find a business that has not been impacted by the pandemic, whether positively or negatively. Share on X

Where are you leaning there? It’s going to be hard for a buyer to bite off that they should be trailing twelve months knowing that the business is taking off because of COVID.

In that situation, I think the end result is going to be in or not mechanism that will be paid out over 2021 and 2022 if the business continues to perform how it has over the last several months.

Is the baseline valuation based on historicals, and the earn-out going that added to?

In this situation, the negotiations began prior to any impact from Coronavirus. They started talking back in March of 2020. In this case, we can see a solid backlog of work that will take this business well into the fall and likely next spring that gives the buyer some comfort that their ends will be there at least into the first part of 2021.

We have a sporting goods manufacturer distributor. As you know, it’s hard to find a bike or canoe. You can’t find any of this outdoor recreational stuff. This guy’s business, the bottom line is five times what it was pre-COVID rightfully. He wants to take advantage of this, but no buyer wants to pay for what maybe a temporary blip. We have a hard time reaching valuation metrics there that are going to make everybody happy.

I think the pandemic has heightened everyone’s awareness on the quality of earnings process. To remind everyone, the primary objective of a quality of earnings exercise is to assess the sustainability and accuracy of a company’s historical earnings, as well as at the same time, assess the achievability of future earnings and future cashflows. The type of stuff that we’re doing because of the Coronavirus is the type of work we’ve always done through a quality of earnings process. It’s quantifying the adjustments, normalizing revenues, and expenses, but it brought the process to life.

You and I have had this conversation before about QV and how important that is. Especially from a sell-side before you take your business out to market, get that work done ahead of time. The buyers are going to have a lot more confidence in your numbers. You’re going to get to a much quicker deal that way.

It depends on every unique business and every unique industry, but we’ve seen adjustments related to lost revenues and profits. We’ve seen adjustments related to disruptions to the workforce, both positive and negative. There’s been severance paid. There have been raises and bonuses paid to keep people employed, especially essential workers. We’ve seen adjustments due to disruptions in the supply chain. We’ve seen a lot of adjustments related to rent. A lot of sellers have negotiated rent abatements when they’re landlords. It’s important to make sure that the monthly P&Ls are burdened with the right rent expense, even though we may have been paying them currently. It’s a wide range of Coronavirus-related adjustments when we’re evaluating a company’s EBITDA.

I know we want to get to PPP, put a bow on this and tell me if you have anything else to add. The advice to everybody reading is, we’re not back to recovery. We’re not at recovery yet. Being able to nail a valuation is going to be hard depending on how hard hit your business was. You may have to wait this out for a recovery or to get more guidance and see what the future looks like before you think about taking your business to market. Let’s move over to PPP. That’s a hot topic. There are many questions about, how you should be handling PPP, what forgiveness looks like carrying it on your books? Why don’t we start with, what are you seeing at a high level with PPP and what should people be thinking about?

There are two big topics as it relates to the PPP in connection with a merger or acquisition. The first is getting a handle on how a seller may be accounting for the proceeds from their PPP loan. What we’ve seen sellers are typically accounting for their proceeds in 1 of 3 ways. The first is recognizing those proceeds into income and inception of the loan for the amount of expected forgiveness. Now that the SBA has extended the covered period for eligible expenses, this is typically 100% of the loan proceeds for most borrowers. Clearly, from a buyer’s perspective, we would look to exclude this income inequality of earnings analysis. The second way a borrower has been treating the proceeds is to amortize the expected forgiveness into income as the related expenses are paid.

For example, if they receive their PPP loan proceeds in April of 2020, and then started incurring payroll and rent expenses in April, May, and June to use up their proceeds, they would amortize the expected forgiveness against those expenses in the period. They’d report reduced compensation expense and reduced occupancy expense in the month of April, May, and June. From a buyer’s perspective, we look to normalize the compensation and rent expense to actual to make sure each month P&L is fully burdened with actual labor and rent. The last way we’ve seen borrowers treat their PPP proceeds is to just record the full amount as debt on the balance sheet and not recognize any P&L effect until such time the loan is formally forgiven. The bottom line is a buyer needs to understand how the seller’s been accounting for their PPP proceeds and how the P&L has been impacted.

The obvious questions that are coming up in the world that you and I live in, which is M&A is somebody’s taken the loan and maybe you’re in the middle of a transaction, while the PPP is being drawn down, or it’s been drawn down and forgiveness hasn’t been given. What should the parties be thinking about and doing as they’re contemplating closing on a transaction? I know those are two very different scenarios.

It’s becoming a more and more common issue. As you’re dealing with it on a daily basis, we are as well. It’s more common that the SBA has extended that covered period to spend the proceeds on qualified expenses from 8 weeks to 24 weeks. In addition, once the funds have been spent on the qualified expenses, the borrower has ten months to apply for forgiveness. The lender has 60 days to approve the forgiveness. The SBA has another 90 days to approve the forgiveness. We could realistically be well into 2021 before these PPP loans are formally forgiven. When we look at transaction, these loans can still be outstanding for some time, and there are a lot of variables that need to be addressed.

MAU 60 | PPP Loans

PPP Loans: The pandemic has heightened everyone’s awareness of earnings analysis.


What happens if you’re in a situation where you haven’t completed drawing down on your PPP? You’re in the middle of a transaction, the PPP loan proceeds have not been fully drawn down and you’re contemplating a transaction. Let’s say it’s an asset transaction. What do you do in that scenario? Since the loan is still outstanding and there’s going to be an outstanding amount, that’s not going to transfer.

The biggest issue is getting the buyer and seller to get on the same page on how they’re going to treat the outstanding loan. In the most basic sense, if the buyer and seller’s intent is to treat the proceeds as a debt that will be outstanding for some period of time and never forgiven, there would presumably be a purchase price reduction. It’s like any other debt there would be a cash-free debt, free transaction. Alternatively, if the buyer and seller’s intent is to apply for forgiveness, or if the seller has already applied for forgiveness and yet to receive formal approval, then presumably there would be no reduction in purchase price. Another issue is if the seller has yet to use all the proceeds on qualified expenses. In this case, the buyer will likely request that some cash needs to remain in the business to either satisfy the unforgiven portion of the loan or be available to continue to fund eligible expenses post-close.

Unique to an asset sale, there are a couple of considerations. In an asset sale, the seller typically ceases to exist as a business subsequent to the transaction. If the seller has not applied for forgiveness, their employee account will go to zero, which could significantly impair forgiveness. We’ve seen this play out in real life. One of the workarounds may be the use of a transition services agreement. Whereby the seller continues to employ the individuals and get reimbursed by the buyer, which will allow the seller to reach full forgiveness on the PPP. This may be a last resort because there are lots of other employment issues related to using a transition services agreement. It could be an issue where the seller is going to cease to exist subsequent to the transaction.

Is there a situation where if it’s an asset sale, maybe if there’s an unused portion, the owner then has to put that amount in escrow to be paid back to the SBA? At closing, that check is cut on behalf of the seller so the buyer knows that that liability is in sitting out there. The only thing that’s sitting out there is that portion that was used at that forgiveness is going to be asked for.

We’ve seen that money go into escrow. We’re also seeing those unforgiven balances be repaid at closing, which will be treated just like any other debt at closing. There are some mechanics involved with the seller’s actual loan and loan document itself. Typically, these PPP loan docs require the lender and the SBA to consent to a change in control or sale of assets of the borrower. If that consent is not obtained, the change and control event could result in loan default and require either immediate repayment or could impair the forgiveness.

Word of caution there is you’ve got to get your lender involved early in the process. You understand how they’re going to view this and what the implications are.

We think that that SBA approval or consent of transfer of that loan is going to take some time because they’re very quickly going to be inundated with companies applying for forgiveness.

Tad, have you seen any situations where the banks are allowing a transfer of that obligation?

Yes, we are. We are working on several transactions that have been approved by the first lien lender and we’re waiting for approval from the SBA.

It does have to go to the SBA for their approval as well. Even if the bank is a preferred lender, it still has to go to the SBA. It’s got to be adding time to the process.

Talk to your lender sooner rather than later, if you’re contemplating a transaction. In a stock transaction if the loan has not yet been formally forgiven, a buyer may request a separate escrow in the amount of the PPP amount expected to be forgiven. The buyer wants protection in case the lender or SBA doesn’t approve the application for forgiveness. This is has been, and I think will continue to be a sticking point between buyers and sellers, especially those sellers that we had significant PPP loans. If this is the case, the seller may want some protections too. If there’s a significant amount sitting in escrow pending final approval of forgiveness, the seller may want to negotiate that they want to control the PPP forgiveness application and not rely on the buyer to do that. If the seller does not spend all of the proceeds, as of the data closing, the seller may want to contractually limit the buyer’s use of the remaining amount of qualified expenses to make sure that the proceeds are used on eligible expenses and they maximize the forgiveness.

It’s a great point because stock sale, you no longer control what happens. You’re relying on the buyer to process the forms, process them properly and timely. If your money is sitting in escrow, you’re beholden to what they do. The sellers do have to think about that carefully.

Another word of caution for stock transactions. This could be a big one for some time. In a stock transaction, the buyer typically inherits all liabilities, whether they’re known or unknown, they’re disclosed or undisclosed that exists at the time of sale. As relates to the PPP, there could be a potential liability lingering out there long after the PPP loans been forgiven. Let’s fast forward twelve months from now, and the seller has applied for forgiveness, received approval, taking the liability off their books. Recall that the borrower had to obtain the loan and use the proceeds in accordance with the program. The SBA has said that they reserve the right to review any application for forgiveness at any time. This could include after initial forgiveness. There’s some misconception that the SBA can only review loans over $2 million. That’s not true loans. Loans over $2 million will automatically be audited by the SBA, but at the same time, the SBA reserves the right to review any loan.

If you're a buyer or a seller contemplating a transaction, consult with all your advisors to make sure the PPP loan is properly addressed. Share on X

Tad, if I understand correctly, that audit may come after loan forgiveness was given by the SBA.

It’s important for a buyer to consider if a seller has had a PPP loan at any time, whether it’s still outstanding or not. They should vet that the program requirements were met. A buyer can perform some diligence on the seller’s process for applying for the loan, the related forgiveness, the eligibility for the amount, use of the proceeds, all the certifications, etc.

Attorneys having a field day on these level periods and the indemnifications and reps and warranties.

It will be interesting to see how reps, warranties, and insurance covers the forgiveness of a PPP loan whether that’s a carve-out or not. There needs to be some reps and warranties and purchase agreements to protect the buyer.

I didn’t know that the audit could come after your loan has been forgiven, but if that’s the case, you’re right. Who knows how backlog they are going to be? This could drag out for years. Do you have any sense of what percentage of the PPP loans were over $2 million?

I know there are stats out there. I don’t know them off the top of my head. It’s very few. I want to say less than 10% of the loans were over $2 million.

It tells me that they’re going to dip below the $2 million threshold if it’s less than 10%. Even though they’ve thrown out that benchmark, be prepared. Do you have anything else that you think would be important for people to know about PPP?

It’s important that if you’re a buyer or a seller contemplating a transaction, consult with all your advisors. Whether it’s your attorney, your accountant, your intermediary, your lender to make sure the PPP loan is properly addressed both in the economics of a transaction, but also in the purchase agreement.

This is a topic that’s not going away. I feel we’re going to be talking about this for a while.

I would love to do an update at some point when we’ve been through the process a couple of times because it’s new to everyone. It will be great to get some transactions under our belt.

We have our first deal closing that had a PPP in it and it was fully used. The bank has acknowledged forgiveness, but that is in a panacea.

It will be interesting to see how it plays out.

If people want to get in touch with you, they have questions about either QV in this COVID environment or PPP, how could they reach you?

MAU 60 | PPP Loans

PPP Loans: The biggest issue is getting the buyer and seller to get on the same page how they’re going to treat the outstanding loan.


I can be reached at my email [email protected] or (847) 205-5000.

I always appreciate you being here with us. You’re a wealth of knowledge. I know your time is valuable.

We’ve enjoyed working with you, Domenic and your whole team at Sun Acquisitions on many deals over the years.

Thank you. I appreciate that. We’ll talk to you soon.

Thank you. Take care.

I look forward to seeing you again on the next episode. Until then, please remember that scaling, acquiring, or selling a business takes time preparation and the proper knowledge.

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About Tad Render

MAU 60 | PPP LoansTad Render is a partner with Miller, Cooper & Co., Ltd. and leads the Firm’s Transaction Advisory Services Group. He has over 18 years of experience working with a host of financial and strategic buyers and sellers in a diverse range of industries including manufacturers, distributors, and service companies. His experience includes buy-side and sell-side financial and tax due diligence and general consulting related to mergers and acquisitions.


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