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Change of Ownership in Business with PPP Loans
On October 2, 2020, the Small Business Administration (SBA) issued new guidance and procedures for borrowers with Paycheck Protection Program (PPP) loans. The guidance that was issued specifically deals with changes in the borrower's ownership and the sales of their assets. Before a closing of any sale of ownership, the borrower is required to notify its PPP loan lender of the pending sale. As it is discussed below, the SBA may have to approve of a sale if certain criteria are met.
Under the new guidance, a change of ownership will be considered to have happened when the following have occurred:
1- At least 20% of the common stock in the borrower’s company is sold to an affiliate or an existing owner. (This could occur in one or multiple transactions, as the percentages are aggregated together after the PPP loan was approved. For example, if you were approved on April 1, 2020 then sold 10% of the common stock on April 5, 2020 and 15% of the common stock on September 1, 2020, a change in ownership has occurred since 25% of the common stock has been transferred (since the PPP loan was approved on April 1, 2020).
2- 50% or more of the borrowers assets are sold (measured at FMV) in one or more transactions.
3- The PPP loan borrower mergers its business with another business.
Prior to the close of any of the above-mentioned changes of ownership transactions, the PPP loan borrower must notify their PPP loan lender of the pending transaction and provided them with copies of the proposed transaction.
Depending on facts on circumstances of the PPP loan borrower potential sale, there are different procedures that would need to happen in order for the change of ownership to be fulfilled. However, regardless of the outcomes below, the PPP loan borrower still needs to submit the monthly Form 1502 reports until the PPP loan is completely satisfied.
The below are the different circumstances that could occur, and the procedures that would need to take place, for a change in ownership to occur:
1- If the PPP note has been fully satisfied by the borrower then there are no required procedures on any of the change in ownership transactions listed above. A fully satisfied note can occur in the following ways:
- The borrower has fully paid back the PPP loan.
- The borrower has completed the Loan Forgiveness Process set forth by the PPP requirements, and the SBA as remitted those funds to the PPP lender; or the PPP loan borrower has paid the remaining balance of the PPP loan.
2- If the PPP note has not been fully satisfied by the borrower then the following applies:
- SBA Approval is not required for the below:
- A PPP loan borrower can sell or transfer common stock without the approval of the SBA,
- Only if the sale is 50% or less of the common stock of the borrower’s entity (multiple sales are aggregated to determine this number).
- The PPP loan borrower has completed the loan forgiveness application stating that they have used all of the PPP funds. They have submitted the application to their PPP loan lender with any other required documentation and a PPP loan lender sets up an interest-bearing escrow account, which is controlled by the PPP loan lender with funds that equal the remaining PPP loan amount. After the forgiveness occurs, the funds must be distributed.
- The PPP loan borrower may sell 50% or more of its assets if they have completed the loan forgiveness application stating that they have used all of the PPP funds. They have submitted the application to their PPP lender with any other required documentation and a PPP lender sets up an interest-bearing escrow account, which is controlled by the PPP loan Lender with funds that equal the remaining PPP Loan amount. After the forgiveness occurs, the funds must be distributed.
- If the criteria of one, two, or three above are not met then SBA approval is required. A PPP loan lender may not approve of the change of ownership without SBA approval.
To obtain SBA approval on the change of ownership transaction, the PPP loan lender must submit the following to the appropriate SBA Loan Servicing Center:
1- Reasoning as to why the PPP loan borrower cannot fully satisfy the PPP loan.
2- Details of the change of ownership transaction.
3- Copy of the fully executed PPP note.
4- Letter of Intent and the Purchase and Sale Agreements that set forth the responsibilities of the PPP loan borrower (seller if different from the actual borrower) and the buyer.
5- A disclosure if the buyer already has a PPP loan, and if they do provide the SBA loan number.
6- List of all 20% or more owners of the purchasing company.
The above list in not all-inclusive and the SBA may ask for more information for risk mitigation.
To obtain the SBA approval on a sale of 50% or more of the assets of a PPP loan borrower is solely conditioned on the purchasing company assuming all of the PPP loan borrower's obligations under the PPP loan. This also includes all compliance and administrative requirements under the PPP loan.
If the new owners resulting from any of the above mentioned transactions, regardless of SBA approval, have a separate PPP loan the following must occur after the closing of a transaction list above:
1- If a merger occurred, the new owners have the responsibility to outline the PPP expenses and loans, and provide documentation that shows compliance with those loans.
2- If a sale of assets or sale of common stock occurs, the original PPP loan borrower and the new owners have the responsibility to separate and outline the PPP expenses and funds. Documentation will need to be provided that shows compliance with those loans by each borrower.
The SBA Notice states that regardless of any change of ownership the PPP loan borrower remains responsible for the following:
1- Certifications made in connection with the PPP loan application, this includes the certification of economic necessity.
2- Performance obligations under the PPP loan.
3- Compliance with all other applicable PPP requirements.
The PPP loan borrower is also responsible for the required PPP forms and supporting documents, as well as responsible for submitting those to the PPP Loan Servicer or SBA upon request. For more information regarding change of ownership in business with PPP loans, please contact your advisor at Dermody, Burke & Brown.
The information reflected in this article was current at the time of publication. This article will not be modified or updated for any subsequent tax law changes, if any.