Taking Ownership: How Your PPP Loan Could Affect a Sale or Merger

Are you considering selling your company or merging with another? Be aware that if you received a PPP loan, you might require approval from the Small Business Administration (SBA) to complete the transaction.

On Oct. 2, 2020, the SBA released a Procedural Notice with guidelines for the sale of such a business. It covers what they consider a change of ownership, when approval is required and who bears responsibility for the PPP loan after the transaction.

Change of Ownership Criteria

To establish whether the change of ownership has occurred, SBA will evaluate if at least one of the following three events took place:

• At least a 20% ownership position (either through stock or other means) is transferred to another party. The transfer is assumed to occur regardless of whether the sale took place over one transaction or multiple, and whether the transfer is an arm’s-length entity or affiliate.
• At least 50% of the fair market value of the entity’s assets are transferred to another entity.
• The company merges with another entity.

The SBA will consider all dispositions of ownership, starting from the PPP loan approval date, to determine the aggregate percentage of ownership change. For public companies, a 20% threshold applies only to a single entity acquiring that interest. If more than one buyer received over 20% ownership in aggregate, SBA will only consider it a change of ownership if at least one of those buyers acquired 20% or more.

When SBA Approval is NOT Required

In many instances, the SBA must approve all transactions before they can be finalized. However, there are exceptions. If the loan is already fully satisfied (either repaid or forgiven), SBA approval is not required. Furthermore, SBA will not ask for transaction approval if one of the following two conditions is met:

1. The sale was for 50% or less of the ownership interest.
2. The PPP borrower submits a forgiveness application showing the use of all PPP loan proceeds. The company must also set up an interest-bearing escrow account controlled by the PPP lender for the PPP loan’s outstanding balance.

When SBA Approval IS Required

In any scenarios not covered above, SBA approval is required for the ownership change. To get this approval, the borrower submits the request to an SBA loan servicing center and includes the following:

• The reason why the borrower cannot fully satisfy all outstanding PPP obligations (nor establish an escrow account with enough funds to meet such obligations)
• Details of the proposed transaction
• A copy of the PPP note
• A letter of intent and the purchase or sale agreement outlining PPP-related responsibilities of the borrower, seller and buyer
• Disclosure of whether the buyer has an existing PPP obligation (and, if so, the SBA loan number)
• A list of all purchaser’s major shareholders (those with 20% interest or more)

The SBA could also request additional disclosure or risk-mitigating measures to approve the deal.

Continuity of Responsibilities

Changing ownership does not eliminate a borrower’s responsibilities under the PPP loan agreement. Regardless of the deal structure, the original borrower will remain responsible for all the PPP obligations. (This includes certification and compliance requirements present at application time.) The borrower must still submit to the PPP lender or SBA all necessary forms and supporting documentation prescribed by the PPP program—even after the ownership change.

Additionally, if the transaction is structured as an asset sale of 50% or more of the fair market value, the SBA will seek the purchaser to assume all borrower’s PPP obligations and compliance requirements. The buyer must outline their intentions to honor these conditions in the purchase and sale agreement or a separate assumption agreement.

If you are a PPP loan borrower and contemplating a sale or a merger, talk to one of our CPAs. We can guide you through the SBA approval process and its requirements. And if you haven’t yet applied for loan forgiveness, let us help you assess your chances of being approved.

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