How are PPP Loans Handled When Buying or Selling a Business?

Business owners considering buying, selling, or recapitalizing a business which has received a PPP Loan have one more thing to take into account when navigating those transaction; SBA Consent. On October 2, 2020, the Small Business Association (“SBA”) published SBA Procedural Notice 50000-20057, regarding Paycheck Protection Program (“PPP”) Loans and changes of ownership of business that have received PPP Loans. There have been a lot of questions about how PPP Loans should be handled during M&A transactions, and the purpose of the Notice is to provide guidance regarding borrowers’ and PPP Lenders’ obligations with respect to PPP Loans in the M&A context.

According to the notice a “change of ownership” occurs for PPP purposes when “(1) at least 20 percent 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, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.” All sales or transfers that have occurred since the date the PPP Loan was approved must be aggregated when determining whether these thresholds have been met.[2]

Prior to closing on any transaction constituting a change of control, the Borrower must notify the PPP Lender and provide a copy of the proposed agreements. There are no restrictions on transactions where prior to closing the PPP Loan is paid in full or the borrower has received forgiveness (or a combination of the two), or where less than 20% of the ownership interest changes hands, or where less than 50% of the assets are transferred. If one of these requirements are not met, however, the PPP Lender can still approve the transaction without consent of the SBA in the following scenarios:

(1) Any stock sale, merger, or asset sale where less than 50% of the borrower’s stock/ownership or assets are transferred; or,

(2) For any stock sale, merger, or asset sale where more than 50% of the Borrower’s stock/ownership or assets are transferred, the PPP Borrower has completed a forgiveness application, submits it to the Lender, and deposits the outstanding balance of the PPP Loan into an interest bearing escrow account with the Lender pending forgiveness.

For any change of control that does not meet one of these 2 requirements, SBA approval is required and the PPP Lender may not unilaterally approve the transaction. To obtain SBA approval the PPP Lender must submit certain documents regarding the transaction, the buyer, and its ownership, and the submission will be reviewed and a decision provided within 60 days. Information required to be submitted includes the reasons why the Borrower cannot satisfy the PPP Loan obligations or the escrow requirements, details of the transaction, a copy of the PPP Note, any documents evidencing the transaction which set forth the Borrower’s responsibilities as well as the non-borrower party to the transaction, disclosure of any PPP Loan of the buyer, and a list of all owners of any purchasing entity that have 20% or more ownership in the purchasing entity.

Regardless of any change of ownership, the original PPP Borrower will still be responsible for (1) performance of all obligations under the PPP Loan; (2) all certifications made by the Borrower in connection with the PPP Loan application – including economic necessity; and (3) compliance with all other applicable PPP requirements. Additionally, new owners are also liable for the unauthorized use of PPP Loan proceeds by the new owner. If the new owner had previously obtained a PPP Loan, the proceeds must be kept separate and properly allocated amongst the respective Borrowers.

Following any merger, sale, or transfer, the PPP Lender is required to notify the applicable SBA Loan Servicing center within five (5) business days and provide the identity of the new owner(s) and their ownership percentages, Tax Identification Numbers for any owner with more than 20% of the ownership, and the location and amounts of escrowed funds (if any).

A notable omission from the Notice is what happens if SBA consent is required, but not obtained? How does this affect the PPP Lender, and importantly the PPP Borrower? Under the current guidelines it is unclear, but likely outcomes include denial of forgiveness or acceleration of repayment obligations. The new owners may very well be liable for repayment as well.

If you are thinking about, or are in the process of, negotiating a purchase or sale of a business which has obtained a PPP Loan, contact our office today ensure that proper consents are obtained (if required), and to learn more about how we can help allocate risks associated with these obligations through the purchase document.

There are different rules for publicly traded companies, which are beyond the scope of this article.