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Buying or selling a business with a PPP loan: What you need to know

With the M&A market in flux after all the unexpected challenges of 2020, buyers and sellers are likely wondering how their Paycheck Protection Program (PPP) loan comes into play in an M&A transaction. On Oct. 2, we got some answers when the Small Business Administration (SBA) released guidance on what to do if you are buying or selling a business with a PPP loan. The Procedural Notice was addressed to SBA employees and PPP lenders and clarifies how a change of ownership is defined, the steps that need to be taken with a PPP loan, and the obligations of borrowers regardless of change of ownership. Here’s what you need to know:

What defines a change of ownership?

The guidance states that a change of ownership requires at least one of the following conditions to be true for a PPP borrower:

  • A sale or transfer of at least 20% of common stock or other ownership interests has occurred. This can be done in one or more transactions and can be to an affiliate or an existing owner of the entity.
  • A sale or transfer of at least 50% of the PPP borrower’s assets measured by the fair market value in one or more transactions.
  • A PPP borrower merges with or into another entity.

Aggregation of sales and transfers since the date of the approval of the PPP loan is required. Sales or other transfers for publicly traded borrowers must be aggregated when they result in one person or entity holding or owning at least 20% of the common stock or other ownership interest.

What must I do before the ownership change?

  1. Notify your lender if you are contemplating a transaction that will change ownership – this must be done in writing and include relevant documentation.
  2. If your lender is accepting PPP loan forgiveness applications, submit your application with all required documentation (we can help with this).
  3. Set up an interest-bearing escrow account with your PPP lender which will be required in most cases by the SBA.
  4. Determine if SBA approval of the change of ownership is required for your transaction.

How do I determine if SBA approval is required for my transaction?

SBA approval is not required for:

  • Equity sales where the transaction is of 50% or less of the borrower’s equity.
  • Equity or asset sales where the PPP borrower submits a forgiveness application that shows usage of all PPP loan proceeds and that an interest-bearing escrow account has been established with the PPP lender with funds equal to the balance of the outstanding PPP loan. After forgiveness has been processed, the escrow funds are to be used to pay any remaining loan balance plus interest.

SBA approval is required for sales that cannot meet the above criteria. The SBA will have 60 calendar days to review and approve or not approve. The PPP lender is responsible for notifying the SBA within five business days from the completion of the transaction and must submit to the SBA:

  • Reasoning for why the above requirements cannot be met and details of the requested transaction
  • A copy of the executed PPP note
  • A letter of intent and the purchase or sale agreement that includes the PPP borrower, seller (if different than borrower), and buyer’s responsibilities
  • Disclosure of buyer’s existing PPP loan, if any, including SBA loan number and an ownership list of 20% or more of purchasing entity
  • Monthly 1502 reports until the PPP loan is satisfied

What if I don’t set up an escrow account?

Borrowers attempting to make an asset sale with 50% of assets and no escrow account will require a condition of the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. The purchaser will then be responsible for compliance with PPP loan terms, and the assumption must be part of the purchase and sale agreement.

What do I do if I end up with two PPP loans?

Transactions resulting in an owner holding two PPP loans will require the owner to segregate and delineate the PPP funds and expenses with documentation demonstrating PPP requirement compliance for both loans. Being thorough and accurate with your documentation is key.

Anything else I should know?

Loans that are repaid in full or are fully forgiven by the SBA have no restrictions for change in ownership. Note that all PPP borrowers are responsible for the performance of PPP loan obligations, certifications related to the PPP loan application including economic necessity, compliance with all PPP requirements, and supporting PPP documentation and forms. Borrowers will be responsible for providing any and all of this documentation to a PPP lender/servicer or the SBA upon request.

For questions and assistance with an M&A transaction and your PPP loan, reach out to us.