The Recent Release of Affiliate Rules related to the Paycheck Protection Loan Program

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Young focused woman working with chartThe clarification we’ve all been waiting for was provided by the SBA on April 2, 2020 and yes, this includes the much-anticipated affiliate rules. The SBA Section 7(a) loans under the Paycheck Protection Loan Program (PPP) are intended to assist small businesses by offering borrowed funds to pay wages and benefits, mortgage interest, interest on other debt before February 15, 2020, as well as rent and utility payments for the eight weeks following funding.

As a PE firm, you may be wondering if you qualify for the PPP, given your number of employees across your investment footprint. Businesses that qualify for the PPP loan include any business concern, not-for-profit organization, veteran organization, or Tribal business concern, with no more than 500 employees whose principal place of residence is in the U.S. – or those in a specified industry that meet the SBA employee-based size standards. For many businesses this stipulation is clear, for PE firms, not so much. PE firms with employees across portfolio companies and funds may run into trouble calculating their eligibility. Here are few answers to your burning questions on eligibility.

Does My PE Firm Qualify?

The SBA’s affiliation rules apply in determining the number of employees at the impacted business. 13 CFR 121.301 outlines the following tests to determine affiliation. A major point of confusion has been that the PPP affiliation rules are outlined in 13 CFR 121.301 and not 13 CFR 121.103 (which are general guidelines for SBA 7(a) loans).

  1. Affiliation based on ownership – generally met by owning >50% of a company’s voting equity. It can also be met by occupying executive or board positions or allowing certain shareholders preferential rights.
  2. Affiliation under stock options, convertible securities, and agreements to merge – stock options and instruments with convertible ownership provisions are treated as though exercised and can result in the security holder having perceived control of a company.
  3. Affiliation based on management – Executive overlap between companies can cause affiliation, as can overlap by individuals/entities that control the board across companies.
  4. Affiliation based on identity of interest – companies controlled by spouses, children, siblings, or parents that operate similar businesses in similar geography can cause affiliation.

Long story short, the application of these rules will generally require employees at the fund and other portfolio companies to be included in the total employee count. 

This may result in portfolio companies of mature, established funds to be ineligible under the Program, while the portfolio companies of newer funds, smaller funds, funds focusing on minority investments, and/or placing certain debt instruments may qualify. 

It wouldn’t be a government regulation without a few exceptions. Affiliation rules are waived for businesses in the restaurant and hospitality industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program.

Businesses in certain industries can have more than 500 employees (including affiliated entities) and still be eligible for the PPP loans. Note, any increased employee count provisions are still evaluated against the affiliated group.

Next Steps for Private Equity Firms

Regulators are currently working on liquidity resources for companies that exceed the SBA small business concern levels. We expect more clarity on eligibility and application within the next one to two weeks. As with most regulations, patience is required. Our experts are monitoring the available loan programs so you don’t have to (at least, not to the level of detail our experts will). We’re eager to assist with any questions you have and encourage you to reach out. Head over to our COVID-19 Resource Center to view available resources and guidance as we navigate the current situation together.

About our authors

Timm Bellazzini

Timm Bellazzini

Timm Bellazzini, CPA, CGMA, is a Partner and the National Co-leader of Transaction Advisory Services. He delivers consulting and advisory services to a variety of middle-market businesses, with a passion for serving private equity groups and family offices. Timm thrives in the fast-paced transactions world and enjoys working with his clients to both find and create value. With a history of building long-standing relationships, Timm focuses on getting to know his clients on a personal level and drives value by building trust and delivering personal, senior-level attention.

Cheryl Aschenbrener

Cheryl Aschenbrener

Cheryl Aschenbrener, CPA, is a Partner and the National Co-leader of Transaction Advisory Services, with over 20 years of experience in strategic planning, mergers and acquisitions, business advisory and assurance services. Cheryl’s clients rely on her for deep industry expertise and a hands-on approach in structuring and due diligence work for portfolio company acquisitions, strategic buyers and private equity funds. She delivers a fresh perspective and the right team when performing quality of earnings reports and value-added planning for private equity funds.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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