Small business owners say PPP program needs a tune up

Requirements for small businesses to be forgiven for federal paycheck protection loans are at the center of lobbying efforts to revise the program’s guidelines by industry leaders who say the aid package fails to address sector-specific challenges of the coronavirus recession.

The Paycheck Protection Program (PPP) provides small businesses a loan that can be forgiven if they use it to keep employees on their payrolls for eight weeks until the economy rebounds and they can return to work. But industry leaders say the restrictions on how employers can use PPP money could make it so there’s no work to which employees can return.

Officials from the Small Business Administration (SBA), the federal agency responsible for overseeing the program, say the loan can be 100% forgiven as long as borrowers use the money under specific requirements, many of which weren’t finalized until after the program began accepting applications.

The SBA is requiring borrowers to use at least 75% on payroll costs and no more than 25% for certain overhead expenses. The money needs to be deployed for rehiring full-time equivalent employees over the course of eight weeks following loan disbursal, whether or not they’ve been deemed “life-sustaining” by state officials and can conduct in-person business operations.

A reduction in full-time equivalent employees or payment below pre-pandemic levels at the end of eight weeks would result in the same percent reduction in how much of the loan is forgiven. Unforgiven loan funds would have to be paid back with a low-interest loan term — a 1% rate over the course of 24 months.

Small business and industry trade groups, such as the National Federation of Independent Business (NFIB) and the Pennsylvania Restaurant and Lodging Association (PRLA), are pushing for an easing of restriction on how employers can use fully-forgiven PPP loan funds.

According to letters submitted to Washington D.C. policymakers and Congress this past week, NFIB and PRLA officials are asking policymakers to extend the eight-week window to give companies more time to spend PPP money and still be forgiven. They are also asking lawmakers to alter the 75%-25% ratio of forgivable payroll to overhead expenses, respectively, that can be used with PPP loan money.

“We are going to continue to press for these items,” said NFIB Pennsylvania State Director Gordon Denlinger said in an interview last week.

Ben Fileccia, director of operations and strategy for the PRLA, said it’s going to be a while before the public feels comfortable returning to restaurants after a public health crisis. Fileccia said a recent National Restaurant Association poll shows some 2% of restaurants across the U.S. say they won’t be able to open after the crisis.

“Everything is going to ramp up but it’s going to take some time,” Fileccia said. “Eight weeks is not going to be a solution.”

More time needed

Forgiveness requirements will disadvantage businesses forced to cease operations if they can’t use the money to transition to normal operations after eight weeks, said Drake Nicholas, a partner with the Lancaster-based legal firm Barley Snyder. Shuttered PPP borrowers should have the option to use the loan money for payroll expenses once in-person operations can resume and employees can come back to work.

“If it’s shut down for two to three months, it’s not like a business is ready on day one to ramp up,” Nicholas said. “It puts that particular business at a disadvantage because once they’re able to reopen again, they’re probably going to have to draw on other lines of credit or other resources to start up again, where they could have used these [PPP] resources to support their payroll to get them ramped up again.”

Most member businesses surveyed by the NFIB said it will take longer than eight weeks for them to financially recover from the coronavirus-induced economic recession. The survey, conducted after lenders stopped taking PPP applications on April 16, showed 63% of respondents believed recovery will take them into next year.

Only half of small-business PPP borrowers who responded to the survey said they expect to have their loan be fully-forgiven. About 27% said they expect to have at least 75% forgiven, and 3% said they plan to use more than half as a loan.

But that’s not how the program is meant to be used, said SBA Eastern District Spokesperson Sonia Smith. The program was designed for employees to bring workers back onto payroll regardless of whether or not social distancing orders allow the business to resume operations.

“Some businesses might be able to recall their employees, and they may be able to work,” she said. “There are other businesses where you might just be paying [the worker] to sit at home. That is the intent of the program — to bring employees back onto the payroll.”

Nicholas said it is important employees receive wages while mandatory closures are in effect, but employers should have the option to use a greater share of PPP money to support revamping business operations.

“Some would argue that wasn’t what the law was intended, that it was intended to get employees back on the payroll as soon as possible,” he said. “I don’t see how you could take that position and say this program supports small business.”

Fed to offer liquidity to Lehigh Valley lenders, small businesses

With a little more than $100 billion still available in the Paycheck Protection Program (PPP) fund as of Tuesday morning, the Federal Reserve is working to provide an additional $2.3 trillion in economic support loans for struggling communities.

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome H. Powell in a statement at the end of last week. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

Additional funds would ease the strain of capital and liquidity constraints on banks originating PPP loans, but midstate financial institutions said in interviews this week that guidelines for the additional funds and the PPP as a whole are still pending from the Fed and the Small Business Administration.

Main Street Lending Program (MSLP)

The Federal Reserve said the Main Street Lending Program will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering four-year loans to companies with up to 10,000 workers, or with 2019 revenues less than $2.5 billion. Principal and interest payments will be deferred for up to one year.

The Fed will work to ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the MSLP. Lenders can either use MSLP funds to originate new Main Street loans or increase the size of existing ones. Lenders can retain a 5% share and sell the remaining 95% to the Fed’s Main Street facility.

In contrast to the strict guidelines of the PPP stipulating how loan funds can be used by business owners, the latest MSLP guidelines are broader, saying borrowers have to “make reasonable efforts to maintain its payroll and retain its employees” with the loan and can’t use it to repay another outstanding loan.

Most significantly, Main Street loans have to be paid back with an interest rate that’s adjustable based on the secured overnight financing rate plus 250 to 400 base points. That amounts to an interest rate between 2.5% and 4%

“If you follow the rules of the PPP, it basically becomes a grant; in this case, there is not expected to be any kind of a grant component to this,” said Ryan Hurst, a partner with the business consulting services group of Lancaster-based RKL. “This is a bridge loan to make it through this, but monies are ultimately expected to be repaid just like with any other loan.”

Paycheck Protection Program Liquidity Facility (PPPLF)

The Fed’s Paycheck Protection Program Liquidity Facility seeks to “bolster the effectiveness” of the Small Business Administration’s Paycheck Protection Program by supplying liquidity to lenders originating PPP loans while neutralizing the effects on their regulatory capital. The facility will extend credit to eligible financial institutions that originate PPP loans, taking such loans as collateral at face value.

Eugene Draganosky, president and CEO of York Traditions Bank, said the PPPLF will remove significant barriers for lenders by making critical funds available to small businesses, although administrative capacity is the most significant barrier for lenders working to provide critical funds in a timely fashion.

“When we put a loan out, we have to have cash to lend out to our borrowers, and this Federal Reserve lending fund will allow banks to borrow from the Federal Reserve to fund those loans,” Draganosky said. “The alternative for a bank would be to use depositors’ money or take out other loans to fund those PPP loans. When we’re talking about the size of the loans, that could potentially be a drain on a bank’s liquidity except for the fact that [the Fed] has put this program in place.”

Has technology changed the M&A process?

Business sellers and buyers have an easier time finding each other thanks to technology’s role in merger and acquisition digital deal-making.

From online “data rooms” where documents are uploaded, read and electronically signed to wire transfer settlements, fund transfers and database prospecting matchmakers geared to coupling sellers with buyers, the digital realm saves time, resources and money.

“(The internet is) a great tool to facilitate information in a controlled fashion to a great number of people, and it’s more secure than email,” said Ryan Hurst, a partner at financial services firm RKL in Lancaster.

He leads RKL’s transaction advisory services practice.

Hurst said “data rooms” may also be known as “virtual data rooms” or “war rooms” – the monikers are interchangeable.

“Technology has allowed a good bit of the negotiation and closing process to take place virtually, which would have been cost-prohibitive 20 years ago,” Hurst said.

Technology has enhanced the overall M&A process, too, because it has created better access to both sellers and buyers, and it allows easier and more reliable access to essential deal-making data.

Glen Bressner, co-founder and managing partner of Activate Venture Partners in Bethlehem said technology has created a more comprehensive way to “aggregate” information about companies across the board.

Activate is located on the Lehigh University Campus at the Ben Franklin Technology Partners Center. Bressner is a Ben Franklin Board member.

“Firms now specialize in identifying and cataloging privately held companies. Their information is available, accessible and is sold in a way that was never available before,” Bressner said.

He specializes in early stage merger and acquisition development and has watched the industry evolve over the past 30 years.

Before the internet and technology’s advancements, Bressner said it would have been difficult, costly and time consuming to even consider – from his Pennsylvania office – purchasing a company on the West Coast.

No more.

“Now I can sit at my computer and search out 50 companies who might be doing what I’m looking for,” Bressner said.

And rich data collection, sourced and gathered by legitimate third-party companies, has made it easier for firms looking to advertise and sell their business.

Businesses poised for acquisition can take advantage of online tools to easily put their companies into the “for sale” marketplace.

“Legitimate data providers have names in the industry. They have the presence in the marketplace, and they are known and well regarded,” Bressner said.

It’s up to the seller to make sure “due diligence” is met when looking for a third-party data provider.

Bressner said online settlements created a greater potential for other business advisors – from bankers, attorneys, financial advisors or business partners, to be involved in M&A settlements, without business travel and its associated costs.

Bressner said since the adoption of federal legislation in Dodd-Frank Act of 2010, becoming a public company is more challenging, more expensive, and perhaps less attractive.

As a result, he noted an uptick in private business sector M&A activity.

Since technology has reduced the overall cost of doing M&A transactions, smaller transactions are more economical – and potentially attractive to buyers and private equity firms than ever before.

“We are seeing the flow of capital from traditional sources” moving into private equity and private markets, Bressner said.

Technology helps private M&A “exit” transactions, too, and he predicts these types of deals will continue to grow.

Kenneth R. Charette, an attorney shareholder at Fitzpatrick Lenz & Bubba in Allentown, said technology has impacted just about every aspect of business M&A transactions.

“It’s created easy and efficient access for the buying team to review documents,” Charette said.

Bressner said digital legal documents, contracts and providing financial information is more standardized now, and he credits technology’s use as “…a major positive development.”

Charette noted cyber security risks to data room documentation can be minimized when online access is restricted on a need-to-know or view basis.

“For example not everyone may need access to payroll records, but human resources staff does. Or financial documents can be restricted to only those who must review them, or in health care, HIPPA compliance documents,” he explained.

HIPPA stands for The Health Insurance Portability and Accountability Act of 1996.

Making data room folders restricted to tasks can also help protect, as well as streamline the process, Charette said.

He stressed information security and protocols – from how materials are stored to where they are stored (on hard drives or network servers) – are necessary to protect transactions because “everything happens quicker now.”

While digital M&A sales are commonplace and enhance the buying and selling process, Hurst said the personal touch remains a crucial part of sealing the deal in the York/Harrisburg/Lancaster market.

“Here, folks still want to look someone in the eye, and shake a hand,” Hurst said.

Strong economy and low interest rates expected to bring a good year for mergers and acquisitions

This year is starting with even stronger economic indicators than 2019 and that has experts in mergers and acquisitions confident the industry is poised for sustained activity, despite some concerns about headwinds.

Buyers and investors still have a lot of cash to spend, and sellers that can demonstrate solid financials are in “enviable positions,” said Colin J. Keefe, chair of the mergers and acquisitions group of Fitzpatrick Lentz and Bubba, a law firm based in the Lehigh Valley.

Nationwide, about $2 trillion in private equity remains unspent, creating enormous opportunities into 2020 after what had been a solid 2019, said Robert J. McCormack, of Murphy McCormack Capital Advisors in Lewisburg. McCormack also is chairman of M&A Source, a Georgia-based trade group. At is national convention in the fall, M&A Source members were noting that they expect to see an overall strong 2020, McCormack said.

Going into January, interest rates remained low, the stock markets were hitting new highs and trade deals had been announced with China, Mexico and Canada. An end to the Brexit stalemate in Europe appeared to be near, as well. Still, the possible headwinds will include lingering uncertainty over trade, the US election and the fact that a recession is long overdue, several observers noted, adding that businesses naturally dislike uncertainty.

“There was a lot of concern about a recession in the middle of the year,” said Thomas W. Kerchner, managing director of BMI Mergers and Acquisitions, which has offices in the Lehigh Valley, the Philadelphia region and elsewhere. “But right now, it looks very good. There is a lot of money sloshing around in the system.”

Even if activity slows, it only will be in comparison to what has been strong mergers and acquisitions activity in recent years, he and others said. In a Dec. 30 article, the Wall Street Journal reported that deals reached $3.8 trillion globally through Dec. 27, which made 2019 the fourth best year for activity. That was about 4 percent less than in 2018, the journal reported.

Ryan Hurst is a partner, business consulting services group, with RKL LLP, which has an office in Spring Township in Berks County. While the numbers were off nationally, as well as in eastern Pennsylvania, that is in comparison to what had been banner prior years, Hurst said.

“2017 and 2018 were really strong years, so it is a return to normal,” Hurst said, adding that 2020, like 2019, will be marked by some caution in the industry. Businesses don’t like “confusion and uncertainty,” Hurst said.

“Who knows what is going to come up?” Hurst said.

Steady as she goes

For now, though, he and others said that 2020 is starting with a clearer picture than 2019 in some areas. For one, several people noted, federal tax and regulatory policies aren’t likely to change in 2020, with the effects of the 2017 tax reform settling in and the election 11 months off. The national election will give indications about what to expect in 2021, so people will be watching to see what might happen with policies as the winners become clearer, the experts said. In addition to the strong employment numbers statewide and nationally, consumer confidence remains high, and other economic fundamentals are strong. And unlike the start of 2019, 2020 is seeing trade tensions easing, rather than ratcheting up.

“Last year at this time, I was more cautious that a recession was coming,” said McCormack, who pointed out that interest rates remain low, which helps facilitate deals.

So far, talk of a widespread recession has been muted. For years now, the conventional wisdom has been that the country is long overdue for a correction, most likely a mild one and not of the magnitude of the Great Recession 10 years ago.

“No one really knows,” said Kerchner. “There definitely is going to be a recession at some point. But everything is going well, and I don’t see what could upset it.”

Retain your talent

In some cases, the economy is so strong that low unemployment numbers make it difficult for companies to grow, Kerchner said. In fact, Keefe said, the jobless rates have led some companies to seek deals as ways to expand their workforces.

“It’s hard to hire people. You can expand through acquisitions,” Keefe said, adding that dynamic should be a wake-up call for all employers.

“Keep a tight hold on your talent,” he advised. “Good people are not really replaceable right now.”

Some industries, such as the state hardwood industry, have been in a recession even though the overall state economy is strong, McCormack said. That slowdown has been, in part, due to the trade tensions with China, which had been a major market for hardwoods. Overall, a lot of proposed merger and acquisitions activity has involved construction companies, which means that the supply of deals can be higher than the demand, affecting valuations, he said.

Other experts agreed, including Hurst.

“Construction can be a tough one,” Hurst said, especially if there is not something special that a company offers. One enticing element could include a strong workforce, assuming the buyer has done the research to know that the workers will stay.

“It ultimately matters what the work culture is and whether the workers will stick around,” he cautioned.

Deal opportunities

In Pennsylvania, as well as nationwide, the appetite for deals appears to span across most industries, including health care, technology and manufacturing. Keefe said that companies that have a unique technology are ripe for a deal. Medical-device companies would be an example of businesses that have both a technology and a workforce that can make them attractive. Health care companies that are not heavily regulated also continue to garner interest, several people noted.

The strong economic fundamentals going into 2020 are coinciding with the continuing trend of baby boomers retiring in large numbers. Many of them have no plans for a family member to take over or for an obvious successor. That situation means that they will need to sell. The boomer-led trend will last another eight to 10 years, putting a large number of sellers into the market at a time when there are plenty of well-funded buyers, at least for now.

“Baby boomers are a year closer to retirement than they were last year, so they are a year closer to a sale,” said Andrew Kahn, a shareholder with Concannon, Miller & Co. PC in Bethlehem. However, that doesn’t mean a sale will go through. Deals often fall apart because the seller didn’t properly prepare.

Statistically, about 20 percent of the companies listed for sale actually are sold, Kahn said. Sellers often make mistakes such as not properly getting their books in order or overestimating what their companies are worth.

“Either the seller has crazy ideas about what a business is worth, or they truly are not ready to sell,” he said.

A buyer might be willing to pay a premium if they see the value. Smart buyers will look into every corner, so if the majority of your business is with one customer, it might turn a buyer away, he added. Buyers will look at trends in growth and profitability, and a myriad of other angles, such as whether an acquisition target allows personal perks that can’t be sustained, Kahn said. That means sellers must be pro-active and anticipate such questions before putting a company on the market.

But the sheer numbers involved means that 2020 should be strong for mergers and acquisitions. Kahn noted in the past that there are about 4.5 million privately owned businesses run by baby boomers, with total value of more than $10 trillion. He said in early January that the average age of those business owners is now 64.

Others made similar observations.

“As they age out, it is one of the biggest, if not the biggest, drivers of what we are seeing out there,” Keefe said.

Many owners fail to recognize that the day to sell is coming, eventually, and they need to prepare while there might be a lot of interest and a lot of money in the system, several experts pointed out.

“You are either in control or you are not in control,” McCormack said. “It is better to be in control.”