SBA Notice Paves the Way for Change of Ownership Transactions by PPP Borrowers
For several weeks, parties to pending merger and sale transactions involving Paycheck Protection Program (PPP) loans have been asking what will happen to PPP loan forgiveness applications if a borrower sells its business prior to receiving confirmation of forgiveness; a process that has barely started for most borrowers and that can last up to 150 days. On October 2, 2020, the Small Business Administration (SBA) published a highly anticipated procedural notice (Notice) regarding PPP loans and changes of ownership. The Notice gives guidance to parties undergoing M&A transactions and equity-based financings where a PPP loan is involved, that appears to supersede the existing rule that requires SBA approval prior to any changes in ownership. Now, most PPP borrowers can sell their businesses without receiving express consent from the SBA as long as they comply with certain requirements.
In most instances of change of ownership, prior SBA approval is not required, if, prior to the closing of the transaction, the PPP borrower (1) completes and submits a forgiveness application showing the use of all PPP loan proceeds with any supporting documentation, (2) the PPP lender reviews and approves the change of ownership transaction, and (3) the PPP borrower and lender establish an escrow account, in control of the lender, in the amount of the outstanding balance of the PPP loan, which may be used to pay any outstanding PPP loan balance that is not ultimately forgiven, with the balance of such escrow being returned to the PPP borrower following approval of its forgiveness application.
Despite any change of ownership, until the PPP loan is forgiven, a PPP borrower remains liable for: (1) performance of all obligations under the PPP loan; (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity; and (3) compliance with all other applicable PPP requirements.
The Notice also states, that if prior to the closing of a change of ownership, the Borrower’s PPP note has been repaid in full or a PPP borrower has completed the forgiveness process (i.e., SBA remitting funds to the PPP lender or the PPP borrower repaying any remaining PPP balance), then there are no restrictions on such change in ownership. It also identifies certain circumstances where express SBA approval is required, such as where the acquirer is assuming the PPP loan obligations or is unable to fund the escrow to cover the outstanding balance of the PPP loan. If SBA approval is required, the SBA has 60 calendar days from receipt of documentation to review and approve a change of ownership request.
The Notice, while helpful, is silent on what rules apply for changes in ownership that have closed prior to the date of the Notice, leaving a good number of borrowers without guidance.
 The Notice defines a “change of ownership” broadly as the: (i) sale or transfer of at least 20% of the equity interests; (ii) sale or transfer of at least 50% the assets (measured by fair market value); or (iii) merger into another entity by a PPP borrower in one or more transactions.