SBA guidance on business sales before PPP loan forgiveness occurs

2020-10-06

The SBA issued guidance on October 2, 2020, for when an Original Borrower has received a Paycheck Protection Program (“PPP”) Loan and, prior to loan forgiveness, wishes to transfer ownership to a new purchaser. 

Under the SBA Procedural Notice: Paycheck Protection Program Loans and Changes of Ownership For purposes of the PPP, a “change of ownership” will be considered to have occurred when:

  • (1) at least 20 percent 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 including to an affiliate or an existing owner of the entity,
  • (2) the PPP borrower transactions, sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or
  • (3) a PPP borrower is merged with or into another entity.

Regardless of any change of ownership, the PPP borrower remains responsible for (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements. Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender” in this Notice) or to SBA upon request.

There are different procedures depending on the circumstances of the change of ownership, as set forth in the notice.

The PPP Lender may approve the change of ownership and SBA’s prior approval is not required if the certain conditions are met for (i) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger; or (ii) a change of ownership structured as an asset sale.

Prior SBA approval of the change of ownership is required and the PPP Lender may not unilaterally approve the change of ownership if a change of ownership of a PPP borrower does not meet the conditions set out.

The PPP borrower must 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 prior to the closing of any change of ownership transaction. The PPP Lender must submit the request to the appropriate SBA Loan Servicing Center to obtain SBA’s prior approval of requests for changes of ownership.

There are different procedures depending on the circumstances of the change of ownership set forth in the notice. In all cases, the PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

SBA Procedural Notice: Paycheck Protection Program Loans and Changes of Ownership

If the PPP Note is not fully satisfied prior to closing the sale or transfer, the PPP Lender may approve the change of ownership without SBA’s prior approval is not required, only if,

  • the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and
  • an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction: (1) in the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower, and (2) in the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.