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Client Alert: SBA Issues Important Guidance on Sale of a Business with Outstanding PPP Loan

On October 2, 2020, the SBA released guidance on changes of ownership of a business that received a PPP loan.  While the SBA directed these procedures to PPP lenders, unless the SBA has already forgiven the loan entirely the PPP borrower must provide prior notice to its PPP lender, including a copy of the transaction documents and information on the new owners.  In addition, the borrower is likely to have to either place the principal amount of the loan in escrow pending forgiveness determination, or delay its transaction until the SBA approves it.

Definition: For purposes of the PPP, a “change of ownership” occurs when

1. at least 20% of the equity interest in the PPP borrower is sold or otherwise transferred, in one or more transactions (aggregating all sales and other transfers since the date of approval of the PPP loan), including transfers to an affiliate or an existing owner;
2. the PPP borrower sells or otherwise transfers to a new owner at least 50% of its assets, as measured by fair market value, in one or more transactions; or
3. the PPP borrower is merged with or into another entity.

Process: The PPP borrower must provide prior written notice to the PPP lender, including a copy of the proposed transaction document, and the PPP lender’s approval depends upon four different circumstances:

1. The PPP note is fully satisfied. There are no restrictions on a change of ownership if the PPP borrower has (a) repaid the PPP note in full or (b) completed the loan forgiveness process and (i) SBA has remitted funds to the PPP lender in full satisfaction of the PPP note or (ii) the PPP borrower has repaid any remaining balance on the PPP loan.

2. The PPP note is not fully satisfied; equity sale or merger. Prior SBA approval is not required only if (a) the sale or transfer is of 50% or less of the equity of the PPP borrower or (b) the PPP borrower completes and submits a forgiveness application reflecting its use of all of the PPP loan proceeds and the PPP lender establishes an interest-bearing escrow account with funds equal to the outstanding PPP loan balance.

3. The PPP note is not fully satisfied; asset sale. Prior SBA approval is not required in connection with a sale of 50% or more of the PPP borrower’s assets without prior approval of SBA only if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and the PPP lender establishes an interest-bearing escrow account with funds equal to the outstanding PPP loan balance.

4. Obtaining Approval. If the preceding conditions in (1), (2) or (3) are not met, then the SBA must approve the transaction in advance and the PPP lender may not unilaterally approve the change in ownership. The PPP lender must submit the request for approval to the SBA including:
   1. the reason the PPP borrower cannot fully satisfy the note, per (1), above, or escrow funds cannot be established per (2) or (3), above;
   2. the details of the requested transaction;
   3. a copy of the executed PPP note;
   4. a letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower) and buyer;
   5. disclosure of whether the buyer has an existing PPP loan and its SBA loan number; and
   6. a list of all owners of 20% or more of the purchasing entity.

Effect: Regardless of a change of ownership, the PPP borrower remains responsible for:

1. performance of obligations under the loan;
2. the certifications made in connection with the PPP loan application, including the economic necessity certification;
3. compliance with all other PPP requirements; and
4. obtaining, preparing, and retaining all required PPP forms and supporting documentation, including at PPP lender or SBA requires.