Buying and Selling a Business with a PPP Loan

 

The SBA has recently began the process of forgiving PPP loans. Some businesses, however, are being bought and sold with these loans still unforgiven. The SBA has provided requirements regarding how businesses with outstanding PPP loans are to proceed when selling the ownership interest or assets of the business.

The SBA considers there to be a “change in ownership” if at least 20 percent of the common stock or other ownership interest of the borrower or at least 50 percent of the businesses’ assets, measured at fair market value, are sold or otherwise transferred, or if the business is merged with or into another entity.

The PPP borrower remains responsible for performance of all obligations, certifications, and compliance requirements of the PPP loan, including preparing and retaining all required PPP forms and supporting documentation. The borrower must notify the lender in writing of any contemplated change of ownership transactions and provide the lender with a copy of the proposed agreement(s). The only instance when this is not required is if the PPP note is fully satisfied; that is, the PPP loan has been repaid in full either by the borrower and/or by the SBA remitting the funds to the lender.

SBA prior approval is not required in the following scenarios, although lender approval is still required:

·         Sale or Other transfer of common stock or other ownership interest or a merger

o   The sale or other transfer is of 50% or less of the common stock or other ownership interest of the borrower

o   The borrower completes and submits a forgiveness application and an interest-bearing escrow account controlled by the lender is established with funds equal to the outstanding balance of the loan

·         Sale of assets

o   The sale of 50% or more of the assets (measured by fair market value)

o   The borrower completes and submits a forgiveness application and an interest-bearing escrow account controlled by the lender is established with funds equal to the outstanding balance of the loan

SBA prior approval is required if none of the above scenarios can be achieved. The lender must submit the request to the appropriate SBA Loan Servicing Center, along with additional information regarding the potential sale and why the borrower does not meet one of the above scenarios. If the SBA is to approve a sale of 50 percent or more of the assets, the buyer is required to assume all responsibility of the PPP loan and compliance with the terms of the loan.

The PPP Lender is required to notify the SBA of the sale completion within 5 business days, including information regarding the new owners, percentages of ownership, tax identification of owners of more than 20 percent equity, and the location and amount of funds in the escrow account if it was required.

The rules surrounding the PPP program are complex and changing often. Contact us so we can help navigate this important time in your business.