Portfolio Companies and Economic Stimulus

Portfolio Companies and Economic Stimulus Relief Part 1

April 29, 2020

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Fulcrum Partners is sharing with you the following in-depth report, “Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives”. Presented in two parts, the report covers aspects of the Coronavirus Aid, Relief and Economic Security Act (CARES) including here in Part 1, the Paycheck Protection Program for Small Businesses; the Economic Stabilization Loan Program and Main Street Business Lending Program for midsized and larger businesses.

This report was prepared by leading tax and business advisory professionals at BDO USA, LLP and is republished here with their permission.

  • Scott Hendon, International Liaison Partner; National Leader of Private Equity; Co-leader of Global Private Equity, CPA, BDO Dallas Office
  • Jim Loughlin, Managing Director; Business Restructuring & Turnaround Services National Leader, CTP, BDO New York – Park Avenue Office
  • Jeff Bilsky, Partner; National Technical Practice Leader, Partnership Taxation, CPA, BDO Atlanta Office
  • Verenda Graham, Partner; Private Equity Tax National Leader, CPA, BDO Nashville Office

Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 1

Download full report as a PDF

Note: This piece was last updated on April 20, 2020.

The novel coronavirus (COVID-19) has disrupted businesses across every industry, requiring workforces to operate remotely and urgently pivot to crisis management mode. Meanwhile, the pandemic has ushered in a bear market and caused high unemployment, prompting massive economic uncertainty.

Given that the novel coronavirus’s economic damages have been acute and widespread, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion stimulus package signed into law on March 27, 2020, intended to help mitigate the economic devastation caused by COVID-19. Private capital-backed companies are generally ineligible for the prevalent Small Business Administration (SBA) loans due to the maximum employee test, described below. However, all hope for portfolio companies is not lost as there are several incentives outlined in Title IV of the CARES Act that merit attention for midsized and larger businesses as part of the $500B economic stabilization plan described in Title IV of the Act.

Unpacking the Coronavirus Aid, Relief and Economic Security (CARES) Act

The CARES Act comprises multiple loan programs targeted at different groups impacted by COVID-19. The programs PE and VC may be eligible for, both past and present, are highlighted in the figure below.

Programs PE and VC may be eligible for, both past and present

Small Businesses – $377 Billion

Paycheck Protection Program

Perhaps the most publicized feature of the CARES Act is the $349 billion in Paycheck Protection Program (PPP) loans being administered by the SBA. PPP loans are unique in that when they are used for certain designated purposes, such as payroll costs, the entire balance of the loan may be forgiven and excluded from taxable income.

The CARES Act outlines various qualifications that must be met by the borrower in order to obtain a PPP loan. One requirement that is significant for private capital-backed companies is the limit on the number employees that may be employed by the borrower and its affiliates. Small businesses that have received external growth capital from a private equity or venture capital firm will likely be required to include the employees of the private capital provider and its other portfolio companies when applying the 500-employee count, referred to as the maximum employee test. However, there are three potentially important exceptions. First, private equity-controlled hospitality and travel companies, those operating in food service industries (NAICS code 72) and franchises in the SBA’s Franchise Directory are not subject to the 500-Employee Test. Second, the SBA has published a list of maximum employees per industry, some of which include maximums in excess of 500 employees. The industry size standard set forth by the SBA can be found here. Third, there is an exception if a company is backed by a Small Business Investment Company (SBIC), in which case they might qualify for PPP loans.

Given the complexities associated with the affiliation rules as well as the possible exceptions, care should be taken in evaluating individual companies’ potential eligibility. Further guidance can be found here.

In addition, SBA’s Economic Injury Disaster Loans (EIDLs), which are not new, are surfacing in light of COVID-19 since this is the first time a virus or pandemic event has been defined as a disaster. The CARES Act specifically allots $10 billion for EIDLs as part of the support for small businesses, and private capital-backed companies may find this option appealing since many previous underwriting restrictions have been removed, and potential terms include loans of up to 30 years with interest rates as low as 3.75% for small business and 2.75% for non-profits.

Tomorrow Read: Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 2, published here on Deferred Compensation News and Updates.

#Covid19 #BDO #CARESAct #MainStreetBusiness


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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

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