On October 2, 2020, the Small Business Administration (SBA) issued a procedural notice providing long-awaited guidance for changes of ownership of a PPP borrower. While the new rules present additional burdens and reporting requirements for the sale or transfer of an ownership interest of a PPP borrower, the procedural notice does provide greater clarity for participants in M&A transactions seeking to preserve the forgiveness of a loan, and borrowers and their advisors now know what is expected.
PPP Borrower Ownership Changes
The SBA’s new procedural notice (Notice) is very important to small business owners considering selling or merging their businesses because prior to the closing of any change of ownership transaction they will now need to notify their PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements. The Notice considers a “change of ownership” to be any one of the following:
- Sale or transfer of at least 20% of the common stock or other ownership of a PPP borrower;
- Sale or transfer of at least 50% of a PPP borrower’s assets (measured by FMV); or
- The merger of a PPP borrower with or into another entity.
Note that there are different procedures depending on the circumstances of the change of ownership. The Notice will not apply after a PPP Note is “fully satisfied”, when there is an entity ownership transfer of less than 20% of total ownership or when a borrower transfers less than 50% of its assets measured by fair market value. A PPP note is considered “fully satisfied” upon occurrence of one of the following:
- The PPP borrower has repaid the PPP note in full;
- The SBA has remitted funds to the PPP Lender in full satisfaction of the PPP note; or
- The PPP borrower has repaid any remaining balance on the note and has completed the loan forgiveness process in accordance with the PPP rules.
When a PPP note is fully satisfied by having met one of the above three requirements there will no longer be any restriction on ownership transfers and the rules below will not apply.
When SBA Approval Will Not Be Required
The Notice provides that lenders may consent to the borrower’s ownership change without SBA approval in the following circumstances:
- A sale or transfer of 50% or less of the ownership interest of the PPP borrower;
- A sale or transfer of less than 50% of the PPP borrower’s assets; or
- The borrower submits a forgiveness application for the full use of the loan proceeds and provides supporting documentation to the lender, and establishes an interest-bearing, lender-controlled escrow account with funds equal to the outstanding PPP loan balance. After the forgiveness process is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance, plus interest, with the remainder going to the borrower.
Note that, even if a borrower would otherwise need SBA approval by having a transfer of more than 50% of ownership or transferring at least 50% in the value of assets, such approval will not be required if the borrower completes the above loan forgiveness application and escrow account requirements.
Reporting Requirements for Borrowers, Lenders and the SBA
If the borrower does not satisfy the above escrow and forgiveness application requirements and SBA approval is therefore required, the Notice provides that the lender must submit a written request to the applicable SBA Loan Servicing Center including the following:
- The reason(s) why the borrower cannot satisfy the PPP loan obligations or the escrow requirements;
- The details of the transaction;
- A copy of the executed PPP note;
- Any 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;
- Disclosure of any existing PPP loan of the buyer and the applicable SBA loan number; and
- A list of all owners of the purchasing entity that have a 20% or greater ownership interest.
The SBA will review requests for changes of ownership and must provide approval or denial within 60 days of receiving the lender’s completed request. For transactions involving the sale of 50% or more of the borrower’s assets, to obtain SBA approval the buyer must assume all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The purchase or sale document must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity.
For all sales or transfers of common stock or other ownership interest and for all mergers, whether the transaction requires SBA’s prior approval, the PPP borrower or successor (in the case of a merger) will remain responsible for the performance of all obligations under the PPP loan. The borrower must notify the lender in writing of the contemplated transaction and provide a copy of the proposed agreements. The lender is required to notify the applicable SBA Loan Servicing Center within five days after the completion of the transaction, and the notification must include the following:
- The identity of the new owners of the ownership interest;
- The ownership percentages for the new owner(s);
- The tax identification number for any owner(s) holding more than a 20% interest in the entity; and
- Details of the escrow account, including amount and location, if one is required.
We will continue to monitor developments with the Paycheck Protection Program and communicate any significant changes that will impact our clients. For further questions or guidance regarding the loan forgiveness process please contact your BT advisor by calling 770.396.2200.