Pre-coronavirus, the home health and home care industries were already poised for historic consolidation, thanks to the Patient-Driven Groupings Model (PDGM), rising minimum wages and other operational pressures.
Industry leaders predict that the COVID-19 emergency will only drive M&A further going forward. However, home-based care businesses interested in picking up new agencies should heed caution, especially if their potential acquisition targets are recipients of loans under the Paycheck Protection Program (PPP).
So far, dozens of home-based care agencies across the country have received PPP loans of more than $150,000, according to Small Business Administration (SBA) data released earlier this week.
SBA has not released a list of smaller loan recipients, so it’s unclear how many in-home care agencies in total are participating in the program. What is clear, however, is that acquiring a PPP loan recipient comes with risks.
“There are more issues as a purchaser or buyer to beware of in a transaction,” Philip Feigen, attorney and shareholder at the international law firm Polsinelli, said. “But a lot of these things are equally as applicable if you’re on the seller side.”
Feigen and his colleagues ran down a brief checklist for potential buyers during a recent Polsinelli webinar. The considerations are key to ensuring home-based care organizations don’t enter deals that could introduce undue audit risk or eliminate PPP loan forgiveness opportunities down the line.
Factors to consider
The CARES Act created the PPP just a few months ago to help small and mid-sized businesses stay afloat during the COVID-19 emergency. The program set aside billions of dollars in forgivable loans to help eligible applicants make payroll and finance certain other expenses such as rent, utilities and mortgage interest.
Loan forgiveness is conditional on borrowers meeting certain requirements. For example, they must spend 60% of the loan on payroll costs and not cut employees’ pay by more than 25% to be eligible for full loan forgiveness, among other requirements.
The program has been met with widespread confusion by recipients, about 13% of whom are health care and social services businesses, according to SBA data.
That’s only complicated by the fact that the SBA has updated and clarified the PPP rules dozens of times since the program was introduced in April.
As such, it should be no surprise that doing deals with PPP recipients means additional complications and unknown variables. Those should be taken into account before a home-based care provider agrees to acquire a PPP loan recipient.
First, potential buyers should be mindful of the number of employees an acquisition target has, as well as its financial information and the dollar amount of the PPP loan it has received, Feigen said.
One reason for that is so buyers can adequately weigh their audit risks, as the SBA has said that it will audit all PPP loans of more than $2 million dollars.
Once a transaction contract has been signed, the buyer and seller are officially affiliates, which have some implications in the eyes of SBA.
“On the loan forgiveness application, one of the questions that … the [PPP] borrower has to respond to is whether or not they have a loan of more than $2 million or whether, along with its affiliates, it has loans of more than $2 million,” Sara Ainsworth, Polsinelli associate and attorney, said on the webinar.
On top of that, a seller can have additional affiliates.
As such, it’s important for a buyer to consider when a potential deal would close: before or after the seller has received forgiveness for their PPP loans.
If the buyer times the transaction during the loan’s 24-week covered period, it could see a reduction in the loan forgiveness amount it’s eligible for. The purchaser runs that risk if it takes on the loan but fails to bring on the seller’s employees — or if the overall number of employees is less than the number present when the loan was issued.
“It’s potentially problematic if the buyer has fewer employees — because at that point, you really are looking at a likely reduction in the total forgivable amount,” Ainsworth said. “It’s also an issue if the buyer does not take the PPP loan but does take the employees, so the seller is left with the PPP loan, but a lower amount of employees, possibly down to zero.”
Buyers should also ensure that acquisition targets had economic need for the loan and that they have used the funds properly and followed the rules of the program.
Finally — and potentially the most important factor to consider before spending time trying to negotiate a deal with a PPP recipient — home-based care providers need to make sure that it’s allowed. Because the PPP is so new, that’s still somewhat up in the air.
Depending on language in the loan documents, a buyer may need to get the lender’s permission before they can proceed with the transaction. Others banks are handling M&A questions as they arise.
“A lot of banks that we’ve been dealing with … aren’t sure how to handle this situation,” Feigen said. “The reason they’re not sure how to handle this situation is the SBA has not taken a position on whether borrowed can undergo a change of control and how that would affect eligibility for forgiveness.”