Many businesses have received and benefitted from Paycheck Protection Program (PPP) loan funding during the pandemic, but the rules on loan forgiveness have continued to evolve. On October 2, the SBA published a Procedural Notice regarding “change of ownership” in the event that a PPP loan is still outstanding at the time of the sale of a business. It was obvious from the loan documentation that was originally signed, that the sale of a business would be problematic while the loan was still outstanding. Borrowers and advisors have been anxiously awaiting clarification. Highlighted below are the primary areas that were defined.
How does the SBA define “change of ownership”?
The SBA defines a change of ownership in a business when one of the following occurs:
- At least 20% of the common stock or other ownership interest of a PPP borrower, including a publicly traded entity, is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity
- The PPP borrower sells or otherwise transfers at least 50% of its assets, measured by fair market value, whether in one or more transactions
- The PPP borrower is merged with or into another entity
When is SBA approval required?
SBA approval is required on all sale transactions, with the exception of any of the following situations where only lender approval is necessary:
- The PPP loan is fully satisfied, which means the loan is either:
- Paid in full; or
- Forgiven by the SBA (i.e., the SBA has remitted payment to the lender) and any unforgiven amounts are paid in full.
- In a stock sale or merger:
- A sale or transfer of less than 50% of the borrower’s common stock or other ownership; or
- The PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan.
- In an asset sale of 50% or more of the borrower’s assets, if the PPP borrower completes a loan forgiveness application reflecting its use of all loan proceeds and submits it to the lender and puts in an interest-bearing escrow account controlled by the PPP lender funds equal to the outstanding balance of the PPP loan.
What is the borrower required to do prior to the sale?
Prior to the closing of any change of ownership transaction, the PPP borrower must notify the lender in writing of the transaction and provide the lender with a copy of the relevant transaction documents necessary to effectuate the proposed transaction. The lender is required to submit certain documentation regarding the transaction to the SBA within five business days of the completion of the transaction.
Despite the occurrence of a change of ownership, the PPP borrower remains responsible for:
- Continued performance of all obligations under the PPP loan;
- Certifications made under the PPP loan application, including the certification of economic necessity; and
- Continued compliance with all other PPP loan requirements.
The PPP borrower continues to be responsible for obtaining, preparing, and retaining all required forms and documentation and providing these forms and documents to the PPP lender, servicer, or SBA upon request.
The new owners are liable for any unauthorized uses of PPP loan proceeds by the new owner. If the new owner also had a PPP loan, the PPP loan funds must be segregated and properly allocated among the two borrowers.
Where do we go from here?
Although many questions were answered in this most recent guidance, there is much still that remains unanswered, including:
- How can I speed up the process if pending M&A activity is imminent?
- What happens if the bank allowed a sale to already happen prior to the new guidance?
- What recourse do I have if my bank isn’t accepting applications yet?
- Who is responsible if SBA reviews a loan years later and nullifies some or all of the forgiveness?
Open and upfront communication with your bank and/or advisors is critical prior to any transaction. Legislation is continuing to evolve and it’s important to keep up with the latest rules and regulations to make sure you’re making decisions based on accurate data. Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential impacts and benefits. Visit our COVID-19 Resource Center for more resources. To discuss your situation and recovery options, contact an Anders advisor below.All Insights