Our restaurant sellers that took advantage of the PPP loan program are facing a new hurdle if they plan on selling their restaurant any time soon.
It seems Ronald Reagon had it right when he said, “The nine most terrifying words in the English language are: I'm from the Government, and I'm here to help.” Like many well-intentioned government programs, process and regulations can choke the life from a good idea.
The PPP (Paycheck Protection Program) wasn’t just a good idea. It was a great idea. The implementation was quick for most restaurant owners, providing ready capital when they needed it most.
On the back end, however, getting to the “forgiveness” portion of the PPP has simply not been easy. First there are the rumors coming from Congress and bandied about in the press that the SBA would simply do mass forgiveness if the amount is under a certain amount. The number that the Restaurant Brokers have heard is a high of $150,000 to most recently, a version that would forgive anything under $50,000. That means instant forgiveness without the need to file the paperwork that shows the funds were spent for their intended use. At this time however, these are all nothing but hopes as Congress has not acted to make any of these a reality. As a reminder, the intended use covered in the We Sell Restaurants articles on COVID19 were primarily for payroll and related expenses to keep workers employed.
Secondly, the “forgiveness” portals that were supposed to be opened by many lenders have been placed on hold or opened and then closed while the government figured out the form they wanted. For less complex loans there is now the EZ forgiveness application. However on 10/8/2020, Treasury/SBA released additional guidance and a new "Simpler" PPP Forgiveness application (SBA Form 3508S) for use on PPP loans of $50,000 or less. Banks cannot process the new SBA Form 3508S, however as the SBA is updating their forgiveness platform to support the new form
That leaves restaurant sellers and restaurant brokers wondering what to do if they received a PPP loan to keep the doors open and then got a contract to sell. That is where the skills and knowledge of a restaurant broker comes into play because the answer has been a shifting quagmire and you must know the rules in order to avoid a mistake with funds that should be 100% forgiven.
Here’s what has happened to this point. For many of our restaurant sellers, there was no early form of a lien placed on their assets. For closings that took place in the latter part of second quarter, many simply executed a document making sure the restaurant seller accepted the liability and the funds due would be escrowed with the closing attorney.
That worked fine for the deals closing through the end of September. Closing attorneys would simply escrow the amount of PPP funds due from the closing table. When the seller applies and is properly forgiven, they get their funds released to them.
However, as of October 2, new guidance has been issued. The new rule, available at this link, says:
- The PPP borrower must notify the PPP lender in writing and provide a copy of the purchase agreement.
- An interest-bearing escrow account controlled by the PPP lender must be established with funds equal to the PPP loan
- After the forgiveness process is completed, escrow must be disbursed first to repay any remaining PPP loan balance plus interest
On its face, this does not look vastly different from the prior process with funds being escrowed before closing HOWEVER there are some important distinctions.
First and foremost, the lender must be notified and provided with documents prior to closing. If the restaurant seller did not work with a local bank or lender and instead, used an online resource or a third party that was servicing these loans for their bank, it could be difficult (impossible?) to reach a live person and handle this detail.
Many third party or online entities are still wrapped up in trying to figure out forgiveness so the last thing they want to deal with is a store changing hands. It may not be possible for restaurant sellers to get the required notice and consent, much less have them agree to set up an escrow account and monitor it to release escrow.
This could have the chilling effect of slowing down transactions for restaurant sellers, something we are working to avoid.
The hope for all parties is that the forgiveness portals open soon with multiple application versions so that restaurant sellers can submit their paperwork and get forgiveness in place and liens removed.
The other option is always, of course, to pay off the PPP loan but who wants to repay a loan that will be forgiven in time?
We Sell Restaurants will continue to provide resources and guidance to the industry in the face of the ongoing pandemic.