Executive Benefits

Portfolio Companies and Economic Stimulus Relief Part 2

Portfolio Companies and Economic Stimulus Relief Part 2

Author Executive Benefits Team
Date April 30, 2020

We are sharing the second in a two-part report, “Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives”. This report looks at the Coronavirus Aid, Relief and Economic Security Act (CARES) including here in Part 2, the Economic Stabilization Loan Program; Main Street Business Lending Program for midsized and larger businesses, Payroll Tax Incentives; and insights for navigating the crisis.

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

Portfolio Companies’ COVID-19 Economic Stimulus Relief Incentives: Part 2

Download full report as a PDF

Midsized and Larger Businesses – $500 Billion Economic Stabilization Loan Program

Aside from SBA loans, the CARES Act allocates $500 billion for the Treasury to disburse as loans to midsized and large businesses of greater than 500 employees. These loans under the economic stabilization plan lack the option of being forgiven and come with public disclosure requirements but have attractive interest rates and give private capital-backed companies an opportunity to qualify for relief. Of the $500 billion, $46 billion is reserved for air carriers and businesses deemed critical to national security and $454 billion is allocated for other eligible businesses, states and municipalities. Of the $454 billion, $75 billion will be used to fund the Treasury collateral for the Main Street Business Lending Program, which results in $600 billion in Main Street Loans. The remaining $379 billion does explicitly include a loan program for midsized businesses—defined as organizations with between 500 and 10,000 employees, in addition to the general guidance provided in Title IV of the CARES Act.

Main Street Business Lending Program

The Main Street Business Lending Program is a subsequent action taken to offer companies liquidity. Using appropriated funds from the CARES Act, the Treasury will make a $75 billion equity investment in a special purpose vehicle to implement the Main Street Business Lending Program. This program aims to increase the flow of credit to small and medium-sized businesses that were in good financial standing prior to the COVID-19 crisis, including those that employ up to 10,000 employees or had 2019 annual revenues of $2.5 billion or less. This option is specifically aimed at the 40,000 medium-sized businesses that employ 35 million Americans.

Eligible borrowers cannot use the loan proceeds to repay other loan balances or other debt of equal or lower priority unless the borrower has repaid an eligible loan in full. Additionally, the borrower cannot cancel or reduce any existing lines of credit. Other important considerations for eligible borrowers include:

  • Attestation that the borrower requires financing due to the COVID-19 pandemic and will use loan proceeds to make reasonable efforts to maintain payroll and retain employees during the term of the loan
  • A requirement that loan proceeds not exceed a 4X multiple of 2019 EBITDA
  • A requirement that loans follow compensation, stock repurchase, and capital distribution restrictions as provided for in Title IV of the CARES Act

For more information on the Main Street Business Lending Program, see here.

The CARES Act’s Payroll Tax Incentives

The CARES Act provides payroll tax incentives to employers without regard to size or employee headcount. Sections 2301 and 2302 of the CARES Act provide two distinct employment tax benefits for employers, determined on a controlled group and affiliated service group basis. Section 2301-Employee Retention Credit provides a refundable payroll tax credit of 50% on qualifying wages paid from March 13 to December 31, 2020, up to $10,000 per employee, making the maximum credit $5,000 per employee. If an employer has more than 100 employees, on a controlled group or affiliated group basis, only wages paid for hours not worked qualify, while employers with 100 employees or fewer may include all wages to qualify for the credit. Procedures need to be established to document hours “not worked” that are eligible for this credit. This is also a troublesome provision for small businesses that have received external growth capital from a private equity or venture capital firm because any portfolio company treated as an affiliate that receives a PPP loan eliminates the Employee Retention Credit for all other portfolio companies.

Section 2302 provides additional cash flow to all employers, by allowing them to delay the payment of the employer’s share of social security tax (6.2% of wages) due from March 27-December 31, 2020, with 50% being due by the end of 2021 and the balance due by the end of 2022. Forgiveness of a PPP loan eliminates the ability to defer payroll taxes under this provision going forward. However, the statute does not use the term “employer” but indicates that the “taxpayer” who has loan forgiveness is not eligible. Therefore, a small business cannot lose its ability to defer payroll taxes allowed by this provision when a different portfolio company or investor receives forgiveness.

Spotlight on the Affiliations Rule

For portfolio companies that have further questions as to whether or not they qualify for SBA loans, understanding their affiliation rules is key. Pursuant to recently published SBA affiliation rules specifically applicable to PPP loans, affiliation generally exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. Examples of control include an individual, concern, or entity owning or having the power to control more than 50% of voting equity; an individual, concern, or entity owning or having the power to control a block of stock that is large compared to others; or two or more persons owning, controlling or having the power to control less than 50% of voting equity with such holdings equal or about equal in size and large compared to other holdings and, in such cases, the SBA may presume that each controls or has the power to control. If voting equity is widely held and no block is large as compared to all others, then the Board and CEO/President will be deemed to control. Affiliation through management may be found where officers, managing members, or partners who control the management of the concern also control the management of another concern. Another case may be when individuals or entities that control the board of directors of the concern also control the board or management of another concern.

It’s important to note that control may be either affirmative or negative. Negative control includes instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. SBA will consider the totality of the circumstances when determining whether affiliation exists and may find affiliation based on the totality of the circumstances even though no single factor alone may be sufficient to constitute affiliation.

Here are some other ways portfolio companies can protect themselves during the COVID-19 pandemic:

  • Develop a COVID-19 business continuity plan to counteract as much as possible the impact of slowdowns and unbudgeted costs.
  • Prioritize the business’s short-term survival and put a temporary hold on activities that relate to longer term progress.
  • Prepare a robust 13-week cash flow projection to proactively manage cash flow to preserve or generate cash. A cashflow projection is essential for liquidity and business planning and to enable difficult decisions to be made as early as possible as it helps to identify avoidable disbursements and determine potential covenant issues related to borrowing arrangements.
  • Perform various financial scenarios, sensitivity and ratio analyses, examining the overall threat to your organization should elective or non-urgent services decrease at various percentage rates.
  • Identify measures for controlling budgets and increasing cost savings, such as assessing the possibility of outsourcing or reduction of non-critical business activities.

Navigating the Crisis

Understanding your business’ needs and goals in the face of this pandemic is a critical factor in maximizing the total benefit from potential loans, payroll tax incentives, and other tax incentives.

Alternatively, some organizations are urging Congress and the presidential administration to do more. On April 3, the door opened for companies to begin applying for SBA loans and, as to be expected, the system hit overload. Just one day prior, the Small Business Investor Alliance (SBIA) addressed a letter to Secretary Mnuchin asking that as many small businesses as possible have access to PPP emergency loans as quickly as possible. This letter came just after the release of Speaker Pelosi’s letter to Mnuchin and the Treasury on March 31.

While there are obviously a multitude of negative financial impacts due to the coronavirus, there are also some business opportunities based on the heightened need for increased cybersecurity services associated with a remote workplace environment, claims automation, and consumables as we weather the storm. The impact of COVID-19 on valuation, capital deployment and M&A will continue to play out, causing fund managers to pivot strategies and reassess deal flow.

Whenever the current state of affairs levels out, fund managers looking to deploy capital will need to factor in both current and longer-term economic implications of the pandemic on existing portfolios, the scope and nature of which will largely be driven by the industries in which their portfolios operate. Opportunities for investing in distressed situations will become more prevalent and are likely to require more diverse and nimble investment strategies. Currently, many private equity fund managers are laser-focused on triage, conducting assessment of impacts to their portfolio and shoring up capital resources. During this critical time, many firms are performing weekly cash flow calculations and tracking benchmarks that would otherwise occur on a monthly or quarterly basis. This is key in measuring lending capacities before making any new commitment. These significant shifts have the potential to weigh heavily on portfolio companies and may call for a reassessment of debt and accounting issues, as well.

#Covid19 #BDO #CARESAct #TaxIncentives #Payroll,


BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 73,000 people working out of 1,500 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.


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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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