Considering Selling or Merging a Business with PPP Loans? Understand the New SBA Notice Rules to Avoid a Delay Headache

On Friday, October 2nd the Small Business Administration (SBA) issued a procedural notice on PPP loans and changes of entity ownership. 

This may impact small business owners who are thinking of selling or merging their businesses, due to the economic impact of Coronavirus, before their PPP loan is forgiven by both their lender and the SBA, as 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. For many transactions, this could present substantial delays if not planned for or addressed. If you are buying a business, this delay may also factor in. 

Within the current notice, there are consent/escrow requirements will need to be complied with. These include prohibitions against transferring part ownership of the borrower entity or transferring or selling the assets of the borrower.

Our team has summarized the latest SBA notice below. Reach out to your Lurie advisor for guidance or assistance if you are looking at buying, selling or merging a business that obtained a PPP loan this year – to avoid the delay, and headache, of missing this key rule change.

What Is A Change of Ownership?

According to SBA Procedural Note issued on October 2, 2020, for purposes of the PPP, a “change of ownership” will be considered to have occurred when:

  1. At least 20 percent 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, 1 including to an affiliate or an existing owner of the entity,
  2. The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or
  3. A PPP borrower is merged with or into another entity

For the PPP Note to be Fully Satisfied, Thus Have No Restrictions on a Change of Ownership, the following Must Occur:

There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:

  1. Repaid the PPP Note in full; or
  2. Completed the loan forgiveness process in accordance with the PPP requirements, and:
    • 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 PPP loan

If the PPP Note is Not Fully Satisfied, You May Still Be Able to Close, Sell or Transfer, if the Following Applies:

The Notice considers a “change of ownership” to have occurred if any of the following has taken place:

  • 20% or more of the ownership in the borrower is sold or transferred;
  • the PPP loan borrower sells or transfers 50% or more of its assets based on their fair market value; or
  • a PPP loan borrower merges with or into another entity.

What Kind of a Delay Should I Potentially Plan For?

Under the present rules, the lender has 60 days from receipt of the completed application to approve and send it to the SBA, the SBA then has 90 days from receipt to make any objection or cause the loan to be considered as satisfied.  

What About Businesses That Will Almost Certainly Qualify for PPP Forgiveness?

With the PPP Flexibility Act, many businesses should have little trouble hitting the required PPP loan forgiveness thresholds. But the issue or challenge within this new notice applies transfer prohibitions are set forth in the PPP loan agreements, and they do not appear to violate the federal legislation (the CARES Act or the Paycheck Protection Program Flexibility Act of 2020), the interim rules, FAQs (“questions and answers”), or the terms of the forgiveness applications. So, these rules effectively were unknown to borrowers at the time of applying for PPP, yet are likely to be enforceable now.

Even when it is completely clear that the borrower qualifies for complete forgiveness, the months-long delay in following the transfer rules could cause significant headaches for business owners and stall pending deals if not properly planned for.

Guidance and Support for Your Transaction and PPP Forgiveness Questions

Given this latest rule change, we recommend you talk to your transaction advisory attorney on your specific situation and its impact on any pending deals. We will continue to monitor guidance issued by the SBA to see if the SBA issues any further clarifications on these open issues.

How we can help: Schedule a discussion with Lurie’s transaction advisory services specialists to advise on any pending deals you have, and as your partner our team can help you reach a favorable outcome with less stress or delay. 

Need a second set of eyes?

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