Buying or Selling a Restaurant? Here’s how to make sure PPP & EIDLP Loans are Paid

Posted by Robin Gagnon on May 26, 2020 9:10:11 AM


Anyone buying or selling a restaurant today is concerned about existing loans or debt on the business. Buyers are seeking confirmation that lending from either the PPP (Paycheck Protection Program) or EIDLP (Economic Injury Disaster Loan Program) obligations have been paid. We Sell Restaurants is offering these recommendations and advice to those transacting deals in today’s active marketplace. You do not have to put a purchase on hold.  Here is how you ensure you do not encounter an issue down the road.

Everyone in the deal buying or selling a restaurant wants to know that loans are paid off.  For the Paycheck Protection Program this is especially important as there is no personal guarantee on the funds. In addition, our SBA lenders and the industry are advising that due to the speed with which these loans were processed, most do not have a UCC or Uniform Commercial Code filing to secure any form of an interest in the business.

The UCC or Uniform Commercial Code filing is the document that returns when an attorney does a lien search. It reveals whether the business owes money to anyone so that it can sell “free and clear” of any liens or encumbrances. It is critical whether you are buying or selling a restaurant, to ensure that any debt is handled in the transaction.

A personal guarantee on a loan means the person selling a restaurant is “on the hook” so to say, for the lending.  Without that security and without a lien filed on the equipment, some advising the industry suggest there could be successor liability for anyone buying a business in these circumstances. 

Successor liability is exactly what it sounds like.  You are the successor to the operators and thus, without expressly saying so, in buying a restaurant, you may in fact, assume liabilities associated with the business.  In the case of the Paycheck Protection Program, this is particularly important to understand since the person signing the loan expressly did NOT have a personal guarantee or obligation.

Before you panic, there are countless attorneys who are exceptionally good at what they do structuring ways for deals to continue in this situation. These recommendations work whether there is an EIDLP loan or PPP loan in place.

The first and easiest way to insure there is no liability is for the person selling a restaurant to simply file the paperwork with his lender (available at this link for PPP) or get a release in the event of the EIDLP lender. If you get sign off prior to closing that the loan is forgiven or if some portion remains unforgiven, it becomes a settlement item in the closing. This is the cleanest and simplest way to deal with the matter if you are buying or selling a restaurant.

Another strategy is to simply have the amount of the loan “held back” or placed in escrow against the purchase price until the debt is settled.  Once the seller shows there is no remaining balance, the funds are released. If he cannot show it is paid, the closing agent is authorized to pay it out of the proceeds.

A third strategy is to “wrap around” a personal guarantee.  Just because the SBA did not make the person selling a restaurant personally liable, that does not mean that your attorney cannot prepare paperwork having him accept the personal responsibility. The only time you want to use this measure is when the seller has personal assets or a net worth sufficient to satisfy the amount of the loan.

Lastly, you can request a seller note in the amount of the Paycheck Protection Program loan or EIDLP loan. You pay the balance to the seller at closing but the amount due under either program (plus interest or penalties) is a note to the seller.  You then have your attorney craft the seller notes in such a way that you have the right to setoff (or offset) the amount due in the event the liability is not absolved.

If you are buying or selling a restaurant, there are multiple ways that We Sell Restaurants can assist you in being sure that any loan liability is handled prior to closing. There is definitely a path forward to owning your own business. 

For more articles on COVID19 and advice from the Restaurant Brokers at We Sell Restaurants, visit this link.

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Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.

Topics: Support for Restaurants - COVID19 Advice

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