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How to Treat PPP Loan Forgiveness

Ralph (not his real name) is ready to sell the business he started in 1989. He told me he had planned to retire in 2025, but he then said the kind of thing I have heard from others recently, “I want out now, the Covid slowdown has taken the wind out of my sails.”

Ralph gave me a ten-year financial summary. The financial results would support a valuation of $8 million if you looked at results for 2012 through 2018. But the last three years have shown some cracks. Revenue fell about 20% in 2019, and 2020 revenue was down slightly from that. Fortunately, it looks like the decline has stopped because 2021 revenue should be near 2020 levels. “That’s why I’m ready to sell,” Ralph explained, “trying to bring the business back to where it was before the decline will be more work and investment than I want to make.

As we discussed the strategy to sell the business, Ralph disagreed with my valuation calculation. He believed his recent $785,000 PPP loan forgiveness should be treated as revenue. “The government is paying me for the lost revenue I would have had other than for Covid, so it should be included in revenue.”

This calculation wasn’t a minor thing, it represents a valuation swing of $3.5 million. Ralph wouldn’t accept my opinion that PPP loan forgiveness wasn’t revenue, so here’s how I explained it. “It doesn’t matter how we treat it in the offering memorandum,” I told Ralph, “what really matters is how a buyer will perceive it, and I can promise you a buyer will not accept PPP loan forgiveness as revenue.”

Telling a business owner what they don’t want to hear is no fun, especially when they are emotionally tied to the implications of what you are telling them. Ralph was polite but firm, he said he wanted time to think about it, which probably means he wants to find an advisor who will tell him what he wants to hear. But I am certain the ultimate arbiter will be a buyer, and I am equally certain what a buyer will tell Ralph. But bless his heart, Ralph might need to go through the process believing what he wants to believe before he learns the reality of the market.



JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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