COVID-19 Relief Funds in Health Care M&A – Whose Money Is It Anyway?

Over the last several months, health care providers have seen COVID-19 relief funds in various forms, from advances against future payments, to pure grant money. In addition to the much-needed assistance these funds have provided, a new stream of revenue has emerged that must be accounted for, and ultimately negotiated, in a health care transaction. Each category of relief payment received by a selling party must be considered in light of various factors including the type of relief funds; the effect on the value of the deal; when the stimulus funds are received; and how the parties will allocate dollars received and forgiveness both in between sign and close, and post-closing.

1. Types of Relief Funds. The United States government, through many regulatory agencies, has rolled out various stimulus packages and opportunities for relief funds to health care providers. These include the following which represent streams of revenue that have not, historically, been considered within a M&A transaction:

• • Public Health and Social Services Emergency Fund (“PHSSEF”) implemented by the CARES Act which has provided relief funds in three tranches to date. These relief funds are intended to assist “eligible health care providers” in providing COVID-19 response including to prevent, prepare for and respond to the coronavirus, and for health care-related expenses or lost revenues that are attributable to the coronavirus under certain categories.
  • Advanced Payment Protection Program (“APP”) which permitted health care providers to take an advance on certain future services. The advance will then be “repaid” as a reduction in future payments for services.
  • Grants provided by regulatory agencies such as the Centers for Medicare & Medicaid Services, Federal Emergency Management Agency and other agencies. These grants are not tied directly to the provision of services and largely don’t include repayment obligations.
  • Families First Coronavirus Response Act (“FFCRA”) which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The employer is then eligible for certain tax credits related to the provision of FFCRA paid leave.
  • Paycheck Protection Program (“PPP”) which is a loan program that originated under the CARES Act. The PPP is intended to provide small business with cash flow assistance through the use of federally guaranteed loans, backed by the Small Business Administration and potentially forgivable, so long as certain conditions are met. These conditions include using at least 75 percent of the loan funds for payroll and employee benefit costs.

As an initial step, a buyer should request the seller provide information on all COVID-19 relief funds received to date, and any additional relief funds that are anticipated.

2. Effect of COVID-19 Relief Funds on the Value of the Deal. Because relief funds tied to the COVID-19 pandemic are outside the ordinary course of business, the receipt of relief funds by a selling entity prior to negotiation of a transaction may impact its financial statements such that the entity appears to be more profitable. As such a buyer should ensure its financial analysis takes due care to analyze the operations of the seller outside the receipt of relief funds and make reasonable projections into the future. Additionally, the seller entities may want to be prepared to demonstrate how their business is likely to bounce back from the pandemic, necessitating a higher purchase price. In addition to relief funds received prior to beginning negotiations, it should be expected that additional or different relief funds may become available to the seller between sign and close and post-closing. In this respect, flexibility and planning is key. The parties should consider how these funds will be allocated and ensure the definitive documents take into account funds that may be received from new programs that have not yet been identified.
3. Timing of Receipt and Allocation of COVID-19 Relief Funds. Relief funds may be provided to a seller entity at three relevant times during a transaction: prior to signing, between sign and close and post-close. How these various funds are allocated between the parties can be driven by the timing of receipt or other factors such as whether or not the relief fund is tied to the provision of services.

• • Receipt prior to signing – The relief funds that a seller receives prior to signing will likely be considered within the determination of purchase price and therefore won’t need to be separately allocated. However, to the extent such funds require ongoing compliance or repayment obligations that will be satisfied by the buyer, such assumed liabilities should be specifically addressed and accounted for in the purchase price.
  • Receipt between sign and close – The parties to a transaction have a plethora of options to deal with relief funds obtained between sign and close. Each program under which relief funds are provided have different criteria including compliance and repayment obligations which provides for the opportunity to negotiate the treatment of each stream of relief fund revenue separately.

For instance, it may make sense to allocate the following types of relief funds to the seller:

1. 1. Pure grant money since those funds are not tied to the provision of services, provided such funds have been expended as contemplated under the specific grant program prior to closing.
   2. Relief funds for which all requirements/obligations have been met by the seller or will be satisfied prior to close (e.g., PPP or FFCRA depending on timing).
   3. PHSSEF funds that are granted for expenses already incurred and revenue already lost by the seller.

Whereas, other relief funds may more reasonably be allocated to the buyer or subject to an equitable allocation:

1. 1. APP monies to be treated as debt and subject to a net working capital adjustment since the APP payments are merely an advance that is applied to future services.
   2. Relief monies that are tied to ongoing obligations such as the PPP funds.

Alternatively, instead of negotiating each type of relief payment separately, the parties may decide that the deal will be repriced in light of the funds prior to closing, that the funds are split evenly between buyer and seller, or another holistic option determined by the parties.

• • Receipt post-closing – lastly, relief funds received post-closing will most likely be retained by the buyer. However, in the event the funds are tied to pre-closing operations, or if the seller is only conveying a portion of its business to the buyer, there may be opportunities to negotiate receipt of such post-closing relief funds for the seller.

4. Diligence on Relief Fund Use/Compliance. In the event the seller is a recipient of any relief funds that are to be allocated under the transaction documents, it is vital for the buyer to conduct comprehensive due diligence on the specific relief funds received by the seller, seller’s compliance with the obligations tied to the funds and the potential need for future relief funds to maintain operations. For more detailed information about conducting due diligence on the use of these funds and other pandemic-related items, see Hall Render’s article here.

It is important to assess any changes needed to your current transaction process in light of any applicable COVID-19 relief funds. Whether you are in the position of the buyer or the seller, COVID-19 relief funds may change how you view the transaction throughout each stage of the process and the strategic vision moving forward. In any event, the presence of these relief funds will inevitably provide for an interesting aspect to new and ongoing transactions.

If you have any questions or would like additional information, please contact:

• Katie Miller at (317) 977-1404 or kmiller@wp.hallrender.com;
• Rene Larkin at (720) 282-2024 or rlarkin@wp.hallrender.com; or
• Your regular Hall Render attorney.

Hall Render’s attorneys and professionals continue to maintain the most up-to-date information and resources, which are available at our COVID-19 Resource page, through our 24/7 COVID‑19 Hotline at (317) 429-3900 or by contacting your regular Hall Render attorney.

Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.