PPP Loan Proceeds Included in Cash Flows

Griggs v. Griggs, 2023 Vt. Unpub. LEXIS 18; 2023 WL 2473542

A new case from the Supreme Court of Vermont affirms a trial court decision that allows the valuator of a business that received PPP loan proceeds to include those proceeds in the cash flows used to determine the value of the business using the capitalized cash flows method. This is the first case I have seen where this has been done. 

In most (law) cases, the PPP argument comes down to whether the proceeds or potential proceeds should be included as an other asset and be added to the base value of the business. The arguments there are usually based on whether or not the actual receipt of the PPP loan forgiveness is known or knowable at the valuation date.

This case raises a new issue. The BV professional included $87,600 of PPP proceeds in the cash flows. In so doing, she noted to the court that “[t]he court found credible mother's expert's statement that currently valuation professionals tend to leave PPP income in because the intent of the PPP program was to replace lost income to encourage employers to keep employees on payroll during the Covid pandemic.”

Admittedly, I have a very small sample size, but I am not convinced that valuation professionals are in fact generally including these PPP proceeds in cash flows under the income approach. The BV professional in this case did admit that reasonable experts could disagree on this issue. To clarify, the concept is that the PPP proceeds represent income that the company would have received but did not because of the pandemic. Thus, if the proceeds are included in the cash flows, there is a presumption that in fact that income was lost and that it would be there every year in the future. 

I am not sure that is always or even most of the time a correct assumption. The pandemic might have caused a permanent loss of income, which would mean that the proceeds should not be included in the cash flows. I would suggest that, in such litigation, the BV expert should encourage the attorney to be aggressive on cross-examination to explore what research the expert did including the PPP proceeds in cash flows to insure that the income the PPP proceeds represent will indeed be there in the future.