How Does a Paycheck Protection Program (PPP) Loan Affect Business Valuation?
The COVID-19 pandemic has brought countless financial concerns for businesses across the country as many struggle to thrive, or even survive. In this GJM Q&A blog we tackle a question any business will need to answer if they've received a Paycheck Protection Program (PPP) loan and a valuation is in the cards.
Question: How does a PPP loan affect business valuation?
Answer from Jeff Denning, CPA, ABV, CFF:
The COVID-19 pandemic has had an enormous impact on the business sector. The U.S. stock markets were initially affected in late February. Accordingly, appraisers of closely-held businesses have generally considered additional investment risks, lower projected profits, and lower growth rates in valuation engagements using ‘as of’ dates from late February to the present date.
If your company received a loan through the Small Business Administration’s Paycheck Protection Program (PPP), an appraiser will need to take that into account when working to arrive at a value for your business. A business appraiser should separately consider any PPP loan payable balance, offset by unused cash in the PPP account, if any, as of the valuation date and the probability of a forgiveness amount. The consideration of the use of the loan proceeds should be in management’s profit and cash flow projections and then part of the appraiser’s overall probability and scenario analysis under an income approach to valuation.
Jeff Denning is a partner with Gilmore Jasion Mahler, LTD and has 30 years of accounting experience, with a focus on providing services as an accredited business appraiser, forensic accountant, litigation consultant, and expert witness. For the past 20 years, his career has been focused on performing business valuations, accounting investigations, and damage calculations; preparing hundreds of expert reports and appraisal reports; and providing accounting and financial expert testimony.
You’ll find more resources related to the COVID-19 pandemic’s impact on your business at GJM’s COVID-19 Resource Center.
Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.