An October 2020 announcement from the SBA details how to handle paycheck protection program loans (PPP loans) during a business change of ownership.

If you’re a business owner who has received PPP loans and you’re looking to sell, make sure that you cover the SBA rules before a transfer of ownership.

What constitutes a “change of ownership” when it comes to your paycheck protection program loans?

No matter what type of sale or transfer is in question, the borrower is responsible for repayment obligations under the PPP loan and is responsible for notifying the lender about all transactional agreements.

Here’s what constitutes a change in ownership:

  1. Equity: The sale or transfer of 20 percent or more of the common stock or other ownership interest of a PPP borrower since the PPP loan was approved by SBA.
  2. Assets: the sale or other transfer of at least 50 percent of a PPP borrower’s assets in one or more transactions.
  3. Merger: A change of ownership would occur if a PPP borrower is merged with or into another entity.

What to Do Before You Sell

PPP loans originally established under Section 7(a) as a temporary measure under the CARES act are subject to specific rules when it comes to a sale or transfer.

Those looking to sell should:

  1. Notify the PPP Lender in writing of the contemplated transaction.
  2. Provide the PPP Lender with a copy of the proposed agreements or any other documents to do with the proposed transaction.
  3. The PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

If the PPP Note has been repaid or forgiven in full in accordance with SBA standards, and the SBA has remitted funds to the PPP Lender, there is no need to advise the SBA of a change of ownership.

What to do if the Paycheck Protection Program Loans Note is not Fully Satisfied Prior to Closing the Sale

The lender may approve the change in ownership without asking the SBA if the sale is 50% or less of common stock or ownership interest, or if the PPP borrower:

  1. Completes a forgiveness application with proper documentation to the lender
  2. Establishes an escrow account controlled by a PPP lender with funds equal to the balance on the loan
  3. When done the forgiveness process must use escrowed funds to fully repay any balance

In any other case, SBA approval will be required – the PPP lender is not allowed to approve the ownership change on its own.

If SBA approval is required, the lender must make a request to the SBA loan servicing center which includes:

  • Details about why the paycheck protection program loans can not be completed or escrowed
  • A copy of paycheck protection program loans note
  • Letter of intent
  • Purchase/sale agreements
  • Buyers SBA loan number
  • List of owners

The SBA will take up to 60 days to review this information and may approve on a conditional basis.

If the new owners have another paycheck protection program loan, they are responsible for delineating the funds.

The Lender has 5 business days after the transaction to notify the appropriate SBA Loan Servicing Center of the identity of the new owner(s) and their percentages of ownership, the tax ID numbers for owners holding over 20% of the equity, and details pertaining to the escrow account under the control of the paycheck protection program loans lender.

Confused About Paycheck Protection Program Loans? Let Us Help

These paycheck protection program loan guidelines can be complex and burdensome for business owners, and this latest notice leaves plenty of questions unanswered — for instance, what happens if your lender has already approved a transaction that does not meet the criteria above?

If you’re thinking of selling your business but you still have a PPP loan, don’t put yourself at risk of unnecessary penalties.

We’ll help you navigate these complex rules to make sure you are in compliance with the PPP loans program rules and SBA regulations.

Call us at 303-780-7333 for a consultation or schedule an appointment.

Here are some other articles that might be of interest:

What Business Financing Options Are Available During A Pandemic?
How To Sell Your Business: 8 Steps To Help You Clarify The Process And Minimize Headaches
What You Should Expect in Due Diligence if You Sell Your Company