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Your PPP Loan May Affect the Sale of Your Business

Business owners thinking about buying or selling a business while holding onto an outstanding PPP (Paycheck Protection Program) loan should take note of a new Small Business Administration (SBA) Procedural Notice regarding “change of ownership.”

Many business owners utilized PPP loans to help during the pandemic. The PPP has provided 5.2 million loans worth $525 billion to America’s small businesses, supporting more than 51 million jobs. Recently, the PPP opened again for new borrowers and certain existing businesses who already obtained a PPP loan.

“Change of Ownership”

In the SBA’s Procedural Notice, “Change of Ownership” is defined when one of the following actions take place:

  1. At least 20% of the common stock or other ownership interest of a PPP borrower (including a publically traded entity) is sold or otherwise transferred, whether in one or more transactions, to an affiliate or existing owner of the entity.
  2. The PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value) in one or more transactions.
  3. The PPP borrower is merged with or into another entity.

If the PPP note is satisfied, there are no restrictions on a change of ownership if, before closing the sale or transfer, the PPP borrower has:

  1. Repaid the PPP note in full; or
  2. Completed the loan forgiveness process per the PPP requirements and the SBA has remitted funds to the PPP lender in 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 before closing the sale or transfer, the following applies:

  1. SBA approval is not required if the change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger;
  2. The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
  3. The PPP borrower completes a forgiveness application reflecting its use of all PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.
  4. In the case of an asset sale, a PPP borrower may sell 50% or more of its assets (measured by fair market value) without the prior approval of the SBA only if the PPP borrower completes a forgiveness application reflecting its use of all the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.

New ownership

The new owner(s) will remain subject to all obligations under the PPP loan. Also, if the new owners use PPP funds for unauthorized purposes, the SBA will have recourse against the owner for the unauthorized use.

The PPP Lender must notify the appropriate SBA Loan Servicing Center, within 5 business days of completion of the transaction of the:

  • Identity of the new owner of the common stock or other ownership interest;
  • The new owner(s)’ ownership percentages;
  • Tax identification number(s) for any owner(s) holding 20% or more of the equity in the business; and
  • Location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.

Help is available

If you are a business owner with a PPP Loan and you are considering a change of ownership, you should understand the Procedural Notice. The business attorneys at O’Reilly Rancilio are available to answer your questions. For information, please visit our website or call 586-726-1000.

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