With PPP Extension, Borrowers Should Revisit Guidelines for Ownership Changes
The recent extension of the Paycheck Protection Program – made official with President Biden’s signature of the PPP Extension Act – will allow eligible businesses additional time to apply for needed relief.
Buyers or sellers that are still considering applying for a PPP loan or have applied for forgiveness but have yet to receive formal notification of forgiveness should use this time to revisit the SBA’s guidelines in order to effectively understand how an ownership change should be handled and what needs to be communicated to lenders.
In October 2020, the SBA issued a Procedural Notice to address required procedures for changes of ownership related to borrowers that have received a PPP loan.
What is considered a ‘change of ownership’?
The SBA notice defines a change of ownership as meeting at least one of the following conditions:
- At least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity;
- The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions; or
- A PPP borrower is merged with or into another entity.
In all of the above scenarios, the PPP borrower is responsible for the performance of all loan obligations, all related certifications in connection with the loan (including certification of economic necessity), preparing and retaining required PPP forms and supporting documentation as well as providing said documentation to the lender and SBA as needed, and compliance with all other PPP requirements.
What responsibilities fall to the PPP borrower with regard to a change of ownership?
PPP borrowers must notify lenders of a change of ownership in writing prior to a transaction closing and provide the lender with proposed agreements and/or other documentation related to the transaction.
Are specific procedures impacted by the status of a PPP loan?
Yes, the SBA has developed different procedures depending on whether the PPP loan has been satisfied or not.
- There are no restrictions on a change of ownership if the PPP loan has been paid back in full or has been fully forgiven prior to closing a sale or transfer.
- If the loan has not been satisfied, SBA approval is NOT required if:
- The transaction is a stock sale/transfer of less than 50% OR the borrower completes a forgiveness application and sets funds equal to the loan amount in escrow
- The transaction is an asset sale AND the PPP borrower completes a forgiveness application and sets funds equal to the loan amount in escrow.
When does the SBA need to approve a change of ownership?
In circumstances where the above conditions are not met, prior SBA approval of the change of ownership may be required and the PPP Lender may not unilaterally approve the change of ownership. The SBA has 60 days from the date of a completed request to review the submission and make a determination.
For complete details on change of ownership procedures, please refer to the SBA’s Procedural Notice in its entirety.
|How Can We Help?
MFA’s PPP Advisory Team is here to guide customers through the PPP loan and forgiveness process. If your business is in the process of or considering a change of ownership in the future, please connect with us to review any implications resulting from your PPP loan and to determine how best to proceed.
EDITOR’S NOTE: This insight has been updated and was originally published in October 2020.
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