What You Need to Know About PPP and Change of Business Ownership
Generally, the Small Business Administration (SBA) and Paycheck Protection Program (PPP) lenders must consent to certain changes in a borrower’s ownership that occur within one year of the borrower’s PPP loan disbursement. Failure to obtain the necessary consent could prove costly for a borrower, as PPP lenders and the SBA may, among other remedies, deny PPP loan forgiveness applications, declare the full PPP loan immediately due and payable, and even hold the borrower’s successor liable for the PPP loan funds.
Until recently, borrowers were left guessing at what was meant by a change of ownership transaction. On October 2, 2020, the SBA released guidance that provided further clarity on changes of ownership and how to obtain PPP lender and SBA consent.
What is a change of ownership?
According to the SBA, a change of ownership occurs when:
- a transfer of 20% or more of the ownership interest in one or more transactions to an independent third party or an affiliate of the borrower;
- a transfer of 50% or more of the borrower’s assets in one or more transactions; or
- a merger of the borrower with or into another entity.
When is PPP lender consent necessary?
A borrower must obtain PPP lender consent for any change of ownership transaction. PPP lender consent must be given before the transaction is closed. To obtain the PPP lender’s consent, the borrower must notify the lender of the transaction in writing and provide a copy of the stock purchase agreement, asset purchase agreement or merger agreement that will effectuate the proposed change of ownership transaction.
When is SBA consent necessary?
Whether a borrower is required to obtain SBA consent for a change of ownership transaction will depend on the following circumstances:
If the PPP note is fully satisfied, the borrower does not need to obtain SBA consent for any change of ownership transaction. The PPP note will be considered to be fully satisfied when the borrower has obtained full loan forgiveness and the SBA has repaid the PPP note in full, the borrower has obtained partial loan forgiveness and the borrower and the SBA have repaid the PPP note in full, or the borrower has otherwise repaid the PPP note in full.
If the PPP note is not fully satisfied, the PPP lender may unilaterally consent to the transaction and no SBA consent is necessary to the following:
First, SBA consent is not needed if the transfer is of 50% or less of the borrower’s ownership interest or the borrower has otherwise completed and submitted its loan forgiveness application and supporting documents to its PPP lender and the PPP lender establishes an interest-bearing escrow with funds equal to the outstanding balance of the PPP loan.
Second, SBA consent is not needed if the transfer is of 50% or more of the borrower’s assets and the borrower has completed and submitted its loan forgiveness application and supporting documents to its PPP lender and the PPP lender establishes an interest-bearing escrow with funds equal to the outstanding balance of the PPP loan. In addition, the purchasing entity must assume the borrower’s PPP loan obligations, including compliance with the PPP loan terms. This assumption of PPP liability must be part of either the asset purchase agreement or a separate assumption agreement to be submitted to the SBA.
In either scenario where an escrow account is established, the escrow funds will be disbursed after the PPP loan forgiveness process, including any appeal of the SBA’s decision, has been completed. Escrowed funds will be disbursed first to repay any remaining PPP loan balance and interest, and any remaining escrow funds will then be disbursed to the borrower.
For all other change of ownership transactions, the borrower must obtain the SBA’s consent prior to the transaction’s closing.
How does a borrower obtain SBA consent?
A borrower can obtain the SBA’s consent by submitting a request to the appropriate SBA Loan Servicing Center that includes the following:
- the reason why the borrower cannot fully satisfy the PPP note or escrow funds equal to the outstanding loan balance;
- the details of the transaction;
- a copy of the executed PPP note;
- a copy of the letter of intent and the proposed sale or transfer agreement;
- disclosure of whether the buyer has an existing PPP loan and the SBA loan number (if any); and
- a list of all owners of 20% or more of the purchasing entity.
The SBA has 60 days to review and approve or deny a borrower’s request for consent.
How does a change of ownership affect a borrower’s and the new owner’s PPP obligations?
Regardless of a “change of ownership,” the borrower will remain responsible for continued performance of and compliance with all PPP loan obligations and requirements, and for ensuring that all of the borrower’s certifications (including economic necessity) remain true. Borrowers will also be responsible for obtaining, preparing and retaining the required forms and supporting documents to be provided to the PPP lender, PPP servicer, or SBA upon request.
Following the change of ownership transaction, the new owners will be liable for any unauthorized use of the borrower’s PPP loan funds. In addition, new owners who have their own pre-existing PPP loans will need to segregate the pre-existing loan from the acquired borrower’s PPP loan.
To discuss PPP loans and changes in the ownership of your business, please contact an attorney at The Lynch Law Group.