SBA Issues Guidance on PPP Loans and Changes of Ownership

COVID-19 has changed many aspects of conducting business today, including areas related to merger and acquisition (M&A) activities. As many buyers and sellers work to structure satisfactory M&A transactions, they are finding that one or both parties have received Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief & Economic Security (CARES) Act which remain outstanding at the time of the proposed transaction.

SBA Procedural Notice on PPP Loans and M&A Transactions

To address this issue, the Small Business Administration (SBA) recently issued a procedural notice on PPP loans and changes of ownership. It clarifies the treatment of outstanding PPP loans with respect to significant investments, mergers and other ownership changes. It offers guidance to PPP borrowers and lenders on how to treat outstanding PPP loans when ownership changes prior to full repayment or loan forgiveness.

The SBA states that a change of ownership occurs when a PPP borrower is merged into another entity; when 50% or more of the PPP borrower’s assets are sold or transferred through one or more transactions; or when at least 20% of the common stock or ownership interest of a PPP borrower is sold or transferred through one or more transactions. This includes the sale or transfer of the business to an affiliate or an existing owner of the entity. Before the transaction closes in any of the above cases, the PPP borrower must notify the lender of the transaction in writing and provide the lender with a copy of the sale agreement.

Businesses that are PPP borrowers and considering a sale should know that they will be required to escrow a portion of the purchase price related to the outstanding PPP loan amounts until a loan determination is received. They will be required to notify their lenders and the SBA when there is a change in ownership and an outstanding PPP loan. They also may be able to defer taxes on the escrowed funds using the installment sale method.

Satisfying the Loan Before the Transaction Closes

The SBA guidance notes that if the PPP loan is fully satisfied before the closing of the transaction, there are no restrictions on the ownership change. The SBA defines “fully satisfied” as meaning that the borrower has fully repaid the PPP loan, or the loan forgiveness process has been fully completed. In the latter case, either the SBA has fully satisfied the note and remitted funds to the lender, or the PPP borrower has fully repaid any remaining balance on the loan.

The lender can approve a change in ownership, without prior SBA approval, if the note is not fully satisfied prior to closing. This can occur when the sale or transfer involves 50% or less of the common stock or other ownership interest held by the PPP borrower, or in the case of an asset sale, when 50% or more of the assets are sold by the PPP borrower.

When is SBA Approval Required to Complete a Transaction?

Prior SBA approval is not required in the cases noted above if the PPP borrower completes and submits a forgiveness application along with required supporting documentation to the lender. The lender will establish and control an interest-bearing escrow account with funds equal to the outstanding balance of the PPP loan. Once the forgiveness process is completed, the escrow funds must first be disbursed to pay any remaining PPP loan balance plus interest.

In all other cases, prior SBA approval of the change of ownership is required. SBA approval will be contingent on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan terms. To receive SBA approval for the change of ownership, the lender must submit the following documentation to the SBA:

  • The reason the borrower cannot fully satisfy the PPP note or the escrow funds
  • Details of the proposed transaction
  • A copy of the executed PPP note
  • The purchase or sale agreement and/or letter of intent indicating the responsibilities of the borrower, the seller (if different from borrower) and the buyer
  • Disclosure of whether the buyer has an existing PPP loan
  • A list of all owners holding 20% or more of the purchasing entity.

SBA Requirements for All Changes of Ownership

The SBA notes that regardless of whether a transaction requires SBA prior approval or not, the PPP borrower, or successor to the PPP borrower in the event of a merger, remains liable and is subject to all obligations under the PPP loan agreement. If any of the new owners or successors holds a separate PPP loan, the SBA also requires that in the case of the purchase or transfer of common stock or other ownership interest, the PPP borrower and new owner(s) are responsible for segregating PPP funds and expenses to demonstrate compliance with PPP requirements for each borrower. In the case of a merger, the successor is responsible for segregating PPP funds and expenses to demonstrate compliance with PPP requirements for each borrower.

Within five business days of the transaction’s completion, the lender must notify the SBA and provide the following information:

  • Identity of the new owners
  • Percentage ownership of the new owners
  • Tax IDs for any owners holding 20% or more of the equity
  • Location and amount of funds in the escrow account (if required).

PPP loans have kept many companies operating through the difficult months of the pandemic. These guidelines enable businesses to enter into and complete changes of ownership while still meeting their obligations for PPP loan repayment or forgiveness.

If you have any questions about this please contact your ALL tax advisor or call us at 617-738-5200.

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