PPP Loan Guidance for Ownership Changes
As with any economic downturn, we’re seeing a natural uptick in mergers and acquisitions. However, the current pandemic comes with additional complications. Businesses contemplating a transaction, whether buying or selling, were unsure how to address Paycheck Protection Program (PPP) loans and when they need permission from the lenders and/or the U.S. Small Business Administration (SBA) to execute such transactions. Sellers with PPP loans don’t want to give up the benefit these loans provide, but buyers don’t want to take on the reputational and economic risks of the PPP loans. Absent specific guidance, buyers and sellers have taken different approaches in transactions involving PPP loans over the past five months. On October 2, 2020, the SBA issued a Procedural Notice, which provides long-awaited guidance for buyers and sellers in transactions where one or more of the companies have a PPP loan.
As many buyers and sellers have discovered, there are variations in the way lenders and advisors interpret the language in the PPP loan application on “change of ownership” restrictions. With this notice, the SBA defines a change of ownership for purposes of PPP when the following occurs in one or more transactions:
- At least 20 percent of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, including to an affiliate or an existing owner of the entity
- The PPP borrower sells or otherwise transfers at least 50 percent of the fair market value of its assets
- A PPP borrower merges with or into another entity
The notice defines the procedures PPP borrowers must follow if they have a change of ownership. For all change in ownership transactions, the PPP borrower is required to notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.
As expected, there are no restrictions on change of ownership if, prior to closing the sale or transfer, the PPP note is fully satisfied. The SBA considers the note fully satisfied if the PPP borrower has either:
- Repaid the PPP note in full
- Completed the loan forgiveness process in accordance with the PPP requirements and the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or the PPP borrower has repaid any remaining balance on the PPP loan
When the loan isn’t fully satisfied, the notice provides that the PPP lender may approve the change of ownership without the SBA’s prior approval in the following situations:
- The sale or other transfer is of 50 percent or less of the equity of the PPP borrower taking into consideration all transfers occurring since the PPP loan’s approval date
- For all other changes in ownership, i.e., sale of more than 50 percent of ownership interest, merger, or sale of 50 percent or more of fair market value of assets, the PPP borrower completes a forgiveness application (Form 3508 or 3508EZ) reflecting its use of all the PPP loan proceeds and submits the completed application with supporting documents to the PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established equal to the PPP loan’s outstanding balance. The escrow must allow for the funds to be disbursed first to repay any remaining PPP loan balance plus interest after the forgiveness process is complete
In both situations, the PPP lender must notify the appropriate SBA Loan Servicing Center of the amount and location of the funds in the escrow account, as well as certain information regarding the new owners, within five business days of the transaction’s completion.
SBA approval is required if the PPP borrower sells more than 50 percent of its assets or equity and can’t establish an escrow as prescribed. If the SBA’s prior approval is required, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center and include:
- The reason why the loan can’t be fully satisfied, or funds escrowed
- Details of the transaction
- A copy of the executed PPP note
- Any letter of intent and the purchase or sale agreement that defines the responsibilities of the PPP borrower, seller, and buyer
- The buyer’s SBA loan number if it has an existing PPP loan
- A list of all owners of 20 percent or more of the purchasing entity
The SBA will have 60 calendar days to review the completed request and may require additional risk mitigation measures as a condition of its approval of the transaction. For asset sales, SBA approval will be conditioned on the buyer assuming all the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.
For all equity transactions, whether SBA approval is necessary or not, the PPP borrower will remain subject to all obligations under the PPP loan. The SBA will have recourse against the owners for unauthorized use of PPP funds by the new owners.
If any new owners or the successor arising from the transaction has a separate PPP loan, the successor, PPP borrower, and/or the new owners are responsible for segregating and delineating the PPP funds and expenses and providing documentation to demonstrate compliance with the PPP requirements with respect to each PPP loan.
Although this guidance doesn’t answer all the outstanding questions for buyers and sellers, it provides much-needed clarity on the change in ownership approval process and the ability to have more than one PPP loan after a transaction. Questions concerning the notice may be submitted to the lender relations specialist in the applicable local SBA Field Office. You also can reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.