NOTE: This update may not apply to you or your business, but please pass it on to anyone you know who has an outstanding PPP loan and is planning the sale of their business or a significant ownership change soon. The following recent SBA guidance has significant implications for these transactions.
The SBA issued new guidance for businesses that have outstanding PPP loans and have pending ownership changes. This guidance creates an approval process that will cause delays in most sales of businesses where those businesses have outstanding PPP loans. If a company does not qualify for one of the exceptions to the approval process, that company must receive approval from the SBA before completing the transaction. The rules apply if the business transfers at least 50% of its assets (measured by fair market value), over 50% of the ownership of the entity that owns the business is transferred, or if the entity owning the business is merged with another entity.
If there is a change in at least 20% ownership, there is a notification requirement even if the transaction does not require pre-approval from the SBA.
Exceptions to the Approval Process
Loan is Fully Satisfied
The guidance provides for exceptions to the requirement to have the SBA pre-approve the transaction. The first exception is that the PPP loan is fully satisfied. Unfortunately, this exception is not currently very helpful. In order to qualify, the SBA must have already remitted the funds for loan forgiveness to the lending institution and the company must have repaid any remaining balance on the PPP loan. Before a company can meet this exception, both the lender and the SBA must have completed their approval process for the forgiveness application.
Once a borrower submits the loan forgiveness application to the lending institution, the lender has 60 days to decide whether it agrees with the application. If the lender approves the application, they send it to the SBA for SBA approval. The SBA then has 90 days to either remit the funds to the lender or reject the application. If either the lender or the SBA rejects the application, there is an appeal procedure. Under this procedure, even if both the lender and the SBA fully agree with the forgiveness application, the process can take up to 5 months. Businesses that want to close their transaction in 2020 cannot safely rely on this exception.
Transfer of 50% or Less of Ownership Interest in Borrower
If 50% or less of the ownership of the entity owning the business is transferred, then SBA approval for the transaction is not required. All the transfers occurring since the approval of the PPP loan must be aggregated for determining whether the 50% threshold has been met.
Submission of Forgiveness Application and Creation of Escrow Account
To meet this exception the borrower must apply for PPP forgiveness and establish an interest-bearing escrow account with the PPP Lender with funds equal to the outstanding balance of the PPP loan. The application must show the use of 100% of the PPP funds.
In many cases where a business is sold primarily for cash, this exception will be the best way to avoid delays in closing the transaction. However, the exception will require a delay in transferring a portion of the sales proceeds to the seller.
In many cases where the ownership is transferred for consideration other than cash, this exception will be unworkable because of the escrow requirement.
If the business does not meet any of the exceptions, it must submit a request to the proper SBA Loan Servicing Center. That request must contain the following information:
- An explanation of why the borrower cannot fully satisfy the PPP Note or escrow the funds as required by the exceptions. It is unclear how this requirement is handled if the PPP borrower is still in the applicable period and is still spending the loan proceeds for allowed purposes. If the borrower has completed the applicable period but did not spend all the loan proceeds for allowed purposes, it is unclear how this requirement should be applied.
- The details of the transaction.
- A copy of the executed PPP Note.
- Any letter of intent and the purchase or sale agreement. These documents must set forth the responsibilities of the PPP borrower, seller, and buyer.
- A disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number.
- A list of all owners of 20% or more of the purchasing entity.
The SBA may require additional risk mitigation measures before approving the transaction. The SBA will require the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. The purchase agreement must include the appropriate language regarding this assumption of obligations.
The SBA will provide a determination within 60 calendar days of a complete request.
If the borrower has at least a 20% change in ownership, the PPP Lender must notify the SBA Loan Servicing Center within 5 days of the following:
- The identity of the new owner(s) of the ownership interests.
- The new owner(s) ownership percentages.
- The tax identification numbers of any owners holding at least 20% of the ownership of the entity in the business.
- If an escrow is established, the location and amount of the escrow account under the control of the PPP Lender.
Although the notice doesn’t specifically require the borrower to notify the lender of a transaction with a 50% or less ownership change, it does require the lender to notify the SBA. Presumably, there is an implicit obligation of the borrower to notify the lender.
If both the seller and the buyer have PPP loans, the notice requires that the funds and expenses related to the multiple loans be segregated and delineated. Full records must be maintained to demonstrate compliance with the PPP requirements of each loan.