PPP loans can make selling businesses difficult
Pandemic aid and the impending election have changed the potential tax situation, and other considerations, when selling a business.
“Plan ahead,” said Brian Weiner, managing partner at Audent Family Wealth Advisors in Los Angeles. “It would be unfortunate to sell your business after 30 years of hard work so that your earnings go to state and federal taxes.”
Currently, Paycheck Protection Program (PPP) loans, potential payroll tax deferral, and changes in net operating losses under the CARES Act (Coronavirus Aid, Relief and Economic Security) are the most important pandemic-related metrics when selling a business, said Joe Roberts, senior vice president and senior wealth strategist at Rockefeller Capital Management in Philadelphia. “All three have the potential to change the purchase price, and sellers should expect … a thorough review of their PPP application and certifications.”
Business owners also need to weigh valuation issues against the potential increase in capital gains tax rates proposed by likely Democratic presidential candidate Joe Biden, Roberts added.
“PPP loans are not, in and of themselves, too complex, but the rules for their forgiveness are still being worked out,” said Howard Krieger, managing director of CBIZ Valuation Group in New York. “Buyers need to do more due diligence regarding the loan application and the intended use of the loan.” Other pandemic-related economic measures, such as the Economic Injury Disaster Loan program or the more well-known Small Business Administration 7A loan program, are opportunities for companies to optimize their business structure. capital or renegotiate supply chain finance measures, Krieger said.
“Go through the loan cancellation process before you sell your business,” said Julia Carlson, CEO and founder of the Oregon-based Financial Freedom Wealth Management Group. “You will need to provide proof that the funds were used for qualifying expenses.”
“The government has implemented rules for changing ownership before the PPP is surrendered or a loan is paid off,” added Jeff Fazio, chief small business specialist at TD Bank in Mahwah, NJ.
Even after economic measures linked to the pandemic, “the blockade and the grassroots fight are still valid,” said Daniel Gibson, tax partner at EisnerAmper in Iselin, NJ. “Identify expenses that would otherwise be personal benefits so that a buyer can get a more accurate picture of the potential benefits. Be sure to check off all of your government compliance requirements. It’s worth calling each jurisdiction to make sure all of your returns and payment obligations are up to date. If you have key people the buyer wants to keep, be sure to quickly discuss a plan on how to retain them. “
Owners typically underestimate the time and effort it takes to sell businesses. “The buyer and seller normally go through a pre-ritual with each other to establish rapport. Facing a sale in our new virtual world can make it a little intimidating, ”Gibson said. “Buyer due diligence, even in normal times, requires the concentration of internal staff and external professionals. Add in challenges for the buyer doing due diligence during a pandemic and you have a recipe for a real pressure cooker. “
“Before Covid-19, there were standard industrial and economic expectations based on size and industry, and there were pretty standard ways to confirm the quality of one’s earnings. In today’s environment, a seller may need to know more about their suppliers, customers and supply chain verticals, as well as the multiple scenarios that could unfold over the next few months, ” Krieger said.
What is the advice for business salespeople now? “Patience,” said Kevin Mayer, managing director of Citizens M&A Advisory in Cleveland. “The M&A and Acquisition finance market is very fluid at the moment. The merger and acquisition process is also changing: Zoom management meetings are no longer a new idea and the status quo and offsite due diligence is not only a trend, but a requirement in certain circumstances.
Valuing a business in this economy “really depends on the business and the industry,” Mayer said. “There are companies that are resistant to Covid and that are able to sell at full valuation, and even higher valuations, in today’s market.” Examples, he added, include segments of technology, healthcare, business services and packaging.