Selling Your Business When You Have a PPP Loan

By the end of 2020, more than 5 million businesses had requested forgivable loans under the Paycheck Protection Program (“PPP”). In the early stages of the PPP loan program, there were questions about how existing PPP loans affected a business’s sale. In October 2020, the Small Business Administration issued guidance intended to clarify how PPP loans impact a proposed change of ownership.

PPP Borrowers should understand all the requirements they face when transferring ownership of their businesses. This article summarizes the primary requirements set out in the SBA notice.

Have you experienced a change in ownership?

For purposes of the PPP, the SBA notice defines a change of ownership as:

(1) a transfer of at least 20% of a Borrower’s common stock or other ownership interest,
(2) a transfer of at least 50% of a Borrower’s assets (assessed using fair market value), or
(3) a merger involving the PPP Borrower.

Transfers need not occur in a single transaction; ownership changes can also occur based on a series of transactions occurring since loan approval. For stock transfers by publicly-traded Borrowers, a single entity must acquire at least 20% of the Borrower’s stock or ownership interest.

Even if a series of events does not qualify as a change of ownership, there is still a chance it may trigger specific provisions of the PPP Lender. Borrowers must carefully review their loan documentation before determining if an ownership change has occurred.

What responsibilities do you have when changing ownership?

First and foremost, the Borrower remains responsible for all obligations under the PPP loan, including all certifications required for purposes of the loan, and preparation and submission of any required forms or supporting documentation.

PPP Borrowers must notify Lenders, in writing, of proposed ownership changes. Borrowers must also provide the Lender copies of relevant proposed sale or purchase documents. These obligations apply irrespective of whether the Lender requests the documents.

Does your change of ownership require SBA approval?

Not surprisingly, no SBA approval is required for an ownership change if the PPP loan is already fully satisfied, either by the Borrower paying in full or by forgiveness of the loan. When a loan is not fully satisfied prior to the ownership change, the SBA notice specifically details situations where SBA prior approval is not required.

In determining whether the SBA must give prior approval, the notice distinguishes explicitly between stock transfers and mergers on the one hand and asset transfers on the other, although they are subject to similar requirements. When a change of ownership takes the form of a stock transfer or a merger, no approval is necessary when less than 50% of the stock or ownership interest is transferred. Again, it is the aggregate of sales and transfers that have taken place since the loan’s approval that must be considered.

Transactions involving more than 50% of the common stock or ownership interests or more than 50% of the Borrower’s assets still may not require SBA approval. No prior SBA approval is necessary if the Borrower completes a PPP loan forgiveness application and sets up an interest-bearing escrow account (controlled by the Lender) containing the loan’s full remaining balance. While the ownership change may proceed without waiting for a decision on loan forgiveness, should the SBA deny forgiveness of any part of the loan (or should a denial be upheld after appeal), the escrow account first will be used to pay any outstanding balance of the PPP loan, with interest. Interestingly, with respect to asset transfers, the notice further requires that the PPP Lender provide an SBA Loan Servicing Center specific details about the escrow account (location, amount) within five days of completion of the transfer.

All other situations require SBA approval prior to closing the transaction; PPP Lenders may not approve ownership changes on their own in these cases.

How do you get SBA approval for a change of ownership?

The short answer is that the Borrower does not get SBA approval for a change of ownership. Instead, it is the PPP Lender that submits a package of documents to the SBA. The documents must include a statement regarding why the Borrower cannot fully satisfy the loan or details about the submission of escrow funds. The Lender must also submit the details of the change of ownership and any letters of intent, along with the proposed sale documents, so that the SBA is made aware of the responsibilities of the Borrower and the purchaser (and the seller if it is a different entity than the Borrower). Finally, the Lender must submit specific details about the purchaser, including whether they have an existing PPP loan (and the number, if so) and a list of all owners of more than 20% of the purchaser.

The SBA may impose conditions (“risk mitigation measures”) on its approval of a change of ownership. In the case of transfers of more than 50% of a Borrower’s assets requiring SBA approval, the notice specifies that any approval will require the acquiring entity to assume responsibility for all of the Borrower’s obligations under the loan. This commitment must be memorialized in the purchase document or in a separate memorandum submitted to the SBA.

Once the approval request is complete, the SBA will issue a decision within 60 calendar days.

Do I have obligations after the change of ownership?

As noted above, PPP Borrowers remain subject to their obligations under the loan. When the purchaser also has an existing PPP loan, and the transfer is a stock transfer rather than a merger, whether or not the transfer required SBA approval, the Borrower must work with the purchaser to segregate funds and expenses between the existing PPP loans to demonstrate that the obligations of each loan have been properly met.

The notice also sets out post-transaction obligations for the PPP Lender.

The existence of a PPP loan need not be a hindrance to a successful transfer of ownership. So long as the Borrower remains aware of their obligations and ensures SBA approval is necessary, any transaction should proceed smoothly. As always, a Borrower who is unsure about their responsibilities should seek a trained professional’s assistance.

This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction.