Mark Pestronk
Q: I know that, until my agency Paycheck Protection Program (PPP) loan gets forgiven, I am not supposed to sell my agency unless I place the equivalent of the entire loan amount in an escrow account with the bank, as you explained in your Oct. 12 column, "Narrow path to selling agency with PPP loan." Of course, I don't have that much money; if I did, I wouldn't have needed the PPP loan in the first place. So it looks like I am going to go out of business because I cannot sell or obtain forgiveness quickly, even though I have a few interested buyers. Do you know of any way around the escrow rule?
A: There is no doubt that the Small Business Administration has created a Catch-22 for potential sellers, as they cannot sell without the escrow, and they can't afford the escrow unless they sell. However, in representing sellers or buyers over the past eight months, I have come across at least four ways of possibly avoiding the SBA's roadblocks.
I say "possibly" because, except for one way, there is no guaranty that your bank or the SBA would permit these transactions, even assuming that informing them is necessary, so you should consult your own attorney before trying them.
First, the surest method of solving your problem is to have the prospective buyer lend you the money for the escrow. Once you get the money and submit your PPP forgiveness application, you are good to go with the acquisition.
Although this buyer-loan method will work, I imagine that not many buyers would be willing to lend you the money, as they may be short of cash themselves, and once they acquire you after the PPP loan is forgiven, there is really no assurance that they will be able to recoup the loan after paying you the purchase price.
The other transactions are an interim management agreement, a 19% buyout with the option to buy the rest and a lease or license agreement. Under the management agreement, you appoint the prospective buyer's company as the "manager" of your agency, and the manager must inject the necessary working capital to keep you afloat until PPP forgiveness is achieved.
The manager's compensation would consist of any profit that your agency earned, and the manager would need to absorb losses going forward. Once forgiveness is achieved, you could close on the transaction.
Under the 19% buyout method, you would sell just 19% of your stock or assets, as this transaction would not trigger the escrow requirement because it applies to sales of at least 20% of the company. The buyer would then have the option to buy the rest after forgiveness is achieved, but in the meantime, the buyer would be paying toward the purchase price.
Under the lease or license method, you could lease your staff, or license an asset, to the buyer in return for what would have been part of the purchase price and close the transaction once forgiveness is achieved.