Peter H. Tanella
Legal Lingo columnist Peter H. Tanella chairs Mandelbaum Barrett’s National Veterinary Law Center. He earned his JD from Quinnipiac University School of Law and served as a deputy attorney general with the New Jersey Office of the Attorney General’s Division of Law, where he was general counsel to numerous state agencies. He has advised hundreds of veterinarians on practice acquisitions, sales, mergers, partnerships, joint ventures and associate buy-ins, the structuring of management service organizations, and the development of practice succession strategies. He may be emailed at email@example.comRead Articles Written by Peter H. Tanella
Companies nationwide, including many veterinary practices, relied on emergency financial assistance to stay afloat during the COVID-19 pandemic. Today, however, enforcement action by the U.S. Justice Department in the case of Paycheck Protection Program loans to businesses highlights the importance of conducting due diligence when entering into the sale of a veterinary hospital.
A Brief History
In 2020, the Coronavirus Aid, Relief and Economic Security Act was enacted to provide emergency financial assistance to businesses impacted by the pandemic. One aspect of the CARES Act was the Small Business Association’s Paycheck Protection Program, which aided eligible companies in the form of forgivable loans for payroll and other specified expenses. Qualified businesses could receive PPP loans of up to 2½ times their average monthly payroll and a maximum of $10 million. In addition, the second round of PPP funding granted eligible businesses as much as $2 million more.
Both PPP rounds carried interest rates of 1% and required no collateral or personal guarantees. Borrowers were eligible for complete loan forgiveness if specific criteria were satisfied within eight to 24 weeks after the loan’s disbursement. The criteria included:
- Spending at least 60% of the proceeds on payroll costs.
- Using all the proceeds for payroll or other eligible expenses.
- Maintaining employee and compensation levels.
Fighting Loan Fraud
Despite the government fully or partially forgiving an overwhelming majority of PPP loans, the Small Business Association continues to identify loans fraudulently obtained or improperly forgiven based on misrepresentations or omissions of fact.
While concerns about potential fraud were present from the start, the SBA identified internal oversight failures. In response, a federal law passed in 2022 established a 10-year statute of limitations for criminal and civil enforcement against borrowers who engaged in PPP loan fraud. Shortly after, the Justice Department created strike-force teams dedicated to investigating and prosecuting fraud involving COVID-19 relief funds.
The federal government has several legal tools when prosecuting PPP loan fraud, including the False Claims Act, which imposes liability on people and companies defrauding government programs.
In addition to the crackdown, the IRS issued guidance on the repercussions involving improperly forgiven PPP loans. The agency advised that when a loan to a taxpayer is forgiven based on misrepresentations or omissions, the taxpayer cannot exclude the improperly forgiven amount from income and must pay taxes on it.
The Effect on Veterinary Transactions
When two parties engage in a post-pandemic veterinary practice transaction, due diligence should reveal whether the owner received PPP loans or other pandemic relief. However, the buyers and sellers often dismiss any concerns when they see proof that the loans were forgiven. Often, the “proof” is a simple email from the Small Business Association rather than a formal letter or document from the lending bank.
Practice buyers should be aware that PPP loan audits are ongoing. If a future audit determines that loans were improperly forgiven, the financial impact on the buyer can be devastating. On the other hand, sellers should understand that they might be held responsible should issues arise.
Tips for Both Sides
Hospital buyers and sellers should answer these questions:
- Was the seller eligible for the PPP loans applied for and received?
- Does the seller have adequate proof of PPP loan forgiveness?
- Was the seller the subject of an audit or investigation related to PPP loans? Is the seller now the subject of one?
- Did the seller make appropriate representations and warranties regarding the PPP loans?
- Have you reviewed all PPP loan applications to identify any misrepresentations or omissions?
- Did you satisfy all the conditions for PPP loan forgiveness?
- Did you receive documentation from the lending bank confirming PPP loan forgiveness or repayment?
- What representations and warranties did you make to the buyer?
- Did you indemnify the buyer from future PPP loan enforcement actions?
PPP loans and other relief funds were critical in allowing veterinary practices to stay open and treat patients during difficult times. While many businesses are eager to put the pandemic in the past, PPP loans cannot be overlooked when a practice changes ownership. By conducting thorough due diligence, buyers and sellers can ensure that government audits and legal enforcement won’t come back to haunt them.