The Small Business Administration (SBA) responded to the need for Paycheck Protection Program (PPP) loan treatment during a change in ownership by releasing procedural guidance in the evening hours of Friday, Oct. 2nd. While COVID-19 continues to create uncertainty in the overall economy, the deal market is showing signs of life and buyers and sellers appreciate the certainty the SBA has now provided in how to address unforgiven PPP loans when a change in ownership occurs. This guidance is welcome and necessary as the standard PPP promissory note provides that a change in ownership of a borrower is a condition that triggers default on the note.
First, an ownership change occurs when one of the following events occur:
- 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.
Should a change in ownership occur, the PPP borrower is still responsible for all certifications made on the original loan application and compliance with the program, including preparation and retention of all required forms and supporting documentation to obtain and support loan forgiveness. In addition, a borrower must notify the PPP lender in writing of the contemplated transaction and provide the lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.
The status of a borrower’s PPP loan forgiveness process affects the procedures that a borrower must undertake during a change in ownership. For example, if the PPP note is fully satisfied (either through repayment of the note in full or SBA has remitted funds to the PPP lender in full satisfaction of the note) prior to the closing of the sale or transfer or if loan forgiveness has been granted, there are no restrictions on a change in ownership. In contrast, if the PPP note is not fully satisfied prior to the closing of the sale or transfer, certain transactions may or may not require approval prior to the change of ownership and the establishment of an interest-bearing escrow account controlled by the PPP lender until the forgiveness process is complete.
Buyers and sellers should carefully review the SBA procedural guidance and determine the appropriate steps to take during a change in ownership transaction to ensure compliance and avoid missteps that could slow the closing process.