SBA Issues Guidance on PPP Loans and Change of Ownership

During any economic downturn, companies may be looking to merge or sell their businesses. There have been questions about how a merger or sale would affect outstanding Paycheck Protection Program (PPP) loans.

The SBA released new guidance outlining the necessary procedures when there is change in ownership of an entity that has received PPP funds. The guidance clarifies requirements and should help businesses trying to go through the forgiveness process quickly, due to an impending transfer of ownership.

According to the new notice, a “change of ownership” occurs, for PPP purposes, when at least one of the following is true:

  • 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; or
  • A PPP borrower is merged with or into another entity.

For all change in ownership transactions, the PPP borrower is required to notify the PPP lender in writing of the contemplated transaction. They must provide the PPP lender with a copy of the proposed agreements and other documents dealing with the proposed transaction.

As expected, there are no restrictions on change of ownership if, prior to closing the sale or transfer, the PPP note is fully satisfied. The SBA considers the note fully satisfied if the PPP borrower has either:

  • Repaid the PPP note in full
  • Completed the loan forgiveness process in accordance with the PPP requirements and the SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or the PPP borrower has repaid any remaining balance on the PPP loan

If the loan has not been fully satisfied, the notice states the PPP lender may approve the change of ownership without the SBA’s prior approval in the following situations:

  • The sale or other transfer is of 50 percent or less of the equity of the PPP borrower taking into consideration all transfers occurring since the PPP loan’s approval date.
  • For all other changes in ownership, the PPP borrower completes a forgiveness application (Form 3508 or 3508EZ) reflecting its use of all the PPP loan proceeds and submits the completed application with supporting documents to the PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established equal to the PPP loan’s outstanding balance. The escrow must allow for the funds to be disbursed first to repay any remaining PPP loan balance plus interest after the forgiveness process is complete

In both situations, the PPP lender must notify the appropriate SBA Loan Servicing Center of the amount and location of the funds in the escrow account, as well as certain information regarding the new owners, within five business days of the transaction’s completion.

SBA approval of a sale or merger is required if the PPP borrower sells more than 50 percent of its assets or equity and can’t establish an escrow as prescribed. If the SBA’s prior approval is required, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center and include:

  • The reason why the loan can’t be fully satisfied, or funds escrowed
  • Details of the transaction
  • A copy of the executed PPP note
  • Any letter of intent and the purchase or sale agreement that defines the responsibilities of the PPP borrower, seller, and buyer
  • The buyer’s SBA loan number if it has an existing PPP loan
  • A list of all owners of 20 percent or more of the purchasing entity

The SBA will have 60 calendar days to review the completed request and may require additional measures as a condition of its approval of the transaction. For asset sales, SBA approval will be conditioned on the buyer assuming all the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.

For all equity transactions, whether SBA approval is necessary or not, the PPP borrower will remain subject to all obligations under the PPP loan. The SBA will have recourse against the owners for unauthorized use of PPP funds by the new owners.

Although this guidance does not answer all the outstanding questions for buyers and sellers, it provides much-needed clarity on the change in ownership approval process and the ability to have more than one PPP loan after a transaction. Questions concerning the notice may be submitted to the lender relations specialist in the applicable local SBA Field Office. You also can reach out to your HW&Co. advisor.