With more than half of all small businesses receiving Paycheck Protection Program (PPP) loans and the continued economic downturn spurring M&A activity, many PPP borrowers may find themselves considering a change of ownership before the loan expires or is forgiven.
In a recent new Procedural Notice, the SBA issued guidance for sellers and buyers who find themselves in this situation. While some PPP lenders and acquiring companies may require the borrower to pay the loan in full prior to deal closing, the notice clarifies what the SBA will require of both borrower and successor company.
Prior Consent
The notice stipulates that a borrower must notify the PPP lender in writing prior to closing any change of ownership transaction, but not all transfers require prior SBA approval.
Lenders can unilaterally approve the following transfers of ownership without SBA consent:
- A merger, sale or stock sale involving the transfer of more than 50% of the ownership interests or assets of the borrower, as long as the borrower has used all loan funds, submitted a forgiveness application and established an escrow account to cover any unforgiven portion of the loan.
- A sale of 50% or less of the ownership interests, even if the borrower has not yet utilized all of the PPP loan proceeds and therefore cannot submit a loan forgiveness application.
SBA approval is required in addition to lender consent for all other change of ownership transactions. In its request, the borrower must include:
- The reason why the loan cannot be satisfied prior to deal closing;
- Any letter of intent and purchase agreement or merger agreement outlining the responsibilities of the deal participants regarding the PPP loan; and
- A list of the buyer’s owners of 20 percent or more.
The SBA will have 60 days from receipt of the request to make a determination and may require additional risk mitigation measures.
Certifications
Even after ownership changes hands, the PPP borrower will remain responsible for the certification made on the PPP loan application. The SBA will have recourse against the borrower for any unauthorized use of the funds.
Multiple PPP loans
If the buyer has a separate PPP loan, each loan must be segregated and the PPP funds and expenses must be delineated and documented to show compliance with PPP requirements by each borrower entity.
If you are exploring a change of ownership and are concerned about how it will affect your PPP loan obligations, please reach out to your Grassi advisor or contact our Crisis Response & Recovery hotline at 212.223.6216 or response@grassiadvisors.com.
