Last month I wrote about how a Paycheck Protection Program (PPP) loan might affect the sale of a business. Now, as we continue to track the evolving landscape of federal financial programs offered in the wake of the business disruption caused by the coronavirus crisis, comes a new procedural notice from the SBA that formalizes the requirements of borrowers and lenders that are going through a business sale.
First, the SBA has defined a “change of ownership” as a transaction that falls into one of three categories:
- The sale or transfer of at least 20 percent of common stock or other ownership interest of a PPP borrower, including to an affiliate or an existing owner of the entity;
- The sale of at least 50 percent of a PPP borrower’s assets; or
- A merger of a PPP borrower with or into another entity.
Transactions that don’t fall into one of those categories do not need to follow the new procedures, but there is a requirement to aggregate transactions to determine if sales or other transfers meet the definition of a change in ownership.
While the new procedures are being issued to lenders, many of the responsibilities are actually borne by the PPP borrower. That includes the requirement that the borrower notify the lender in writing of the potential transaction and provide the lender with a copy of the proposed agreement(s) or other documentation of the proposed transaction.
Regardless of any change in ownership, the PPP borrower remains responsible for: 1) the performance of all obligations under the PPP loan; 2) certifications made in connection with the PPP loan application, including certification of economic necessity; 3) compliance with all other applicable PPP requirements; and 4) obtaining, preparing and retaining all required PPP forms and supporting documentation.
There are distinct procedures, as well, depending on whether the PPP loan is fully satisfied:
- If fully satisfied – There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the borrower has repaid the PPP loan in full or completed the loan forgiveness process in accordance with program requirements (defined as the date the SBA has remitted funds to the lender in full satisfaction of the PPP loan or the date the borrower has repaid any remaining balance on the loan).
- If the PPP loan is not fully satisfied: There may be restrictions and requirements, depending on the circumstances of the change in ownership. Transactions that do not require approval by the SBA:
- A sale or merger if the proposed transaction represents 50 percent or less of the common stock or other ownership interest of the PPP borrower OR the borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it together with any required supporting documentation to the PPP lender AND an interest-bearing escrow account has been established with funds equal to the outstanding loan balance.
- A sale of assets if the PPP borrower is selling 50 percent or more of its assets only if the borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it together with any required supporting documentation to the PPP lender AND an interest-bearing escrow account has been established with funds equal to the outstanding loan balance.
Transactions that require the approval of the SBA:
- If the proposed transaction doesn’t meet the description of a transaction that does not require the approval of the SBA, then it must be approved by the SBA. The PPP lender must submit documentation of the proposed transaction (i.e. letter of intent, purchase agreement, etc.) and the reason the borrower cannot fully satisfy the PPP loan or establish an escrow account as described above. The SBA will review the submission and provide a determination within 60 calendar days of receipt.
Additionally, for a proposed transaction that involves the sale of 50 percent of more of assets, the SBA’s approval will be contingent on the purchasing entity assuming all of the borrower’s obligations under the PPP loan.
All proposed transactions require that if the new owner has a separate PPP loan, the borrower and the new owner are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower. In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.
If you need more information or assistance regarding your PPP loan or transaction assistance, visit our website, or reach out to any of your contacts at Schneider Downs, including Joel Rosenthal at [email protected].
