New Procedures for PPP Loans for Changes in Ownership

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New Procedures for PPP Loans for Changes in Ownership

On October 2, 2020, the SBA released a Procedural Notice (the “Notice”) regarding Paycheck Protection Program Loans and Changes of Ownership.  The notice clarifies what constitutes a change in ownership and the steps a Paycheck Protection Program (“PPP”) loan borrower must take.

Change in ownership defined:

The Notice defined that, for purposes of the PPP, a change in ownership will have occurred in three instances:

  • Sale or transfer of at least 20% – of the common stock or other ownership interests of a PPP borrower, whether in one or more transactions;
  • Sale or transfer of at least 50% – of the assets of a PPP borrower, whether in one or more transactions, measured by the fair market value of the borrower’s assets; or
  • Merging – of a PPP borrower with another entity.

Required procedures prior to a change in ownership

The SBA indicated that prior to the closing of any change in ownership transaction, the PPP borrower must notify its PPP lender in writing.   Further, the SBA clarified what circumstances require SBA approval prior to the change in ownership transaction.

Cases in which SBA approval is NOT required

For an equity sale, prior SBA approval is not required if:

  1. The transaction is of 50% or less of the equity of the borrower; or
  2. The PPP borrower completes and submits a forgiveness application reflecting use of ALL of the PPP loan proceeds AND an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

For an asset sale, prior SBA approval is not required if:

  1. The PPP borrower completes and submits a forgiveness application reflecting use of ALL of the PPP loan proceeds AND an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

Obtaining required SBA approval

In the event the change in ownership does not meet the conditions described above, the PPP lender may not unilaterally approve the change in ownership. The PPP lender must submit the following to the SBA:

  1. the reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds as described above;
  2. the details of the requested transaction;
  3. a copy of the executed PPP note;
  4. any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
  5. disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
  6. a list of all owners of 20 percent or more of the purchasing entity.

The SBA also stated that an asset sale of greater than 50% of the assets of the borrower where an escrow account is not utilized will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The assumption must be included as part of the purchase and sale agreement.

Maintaining two PPP loans

In the event a change in ownership results in the new owner holding two PPP loan, the new owner is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both loans.

Action Items

If you are contemplating a transaction that will result in a change in ownership you should:

  1. Notify your PPP lender
  2. Understand when your PPP lender is accepting PPP loan forgiveness applications
  3. Submit your PPP loan forgiveness application and required supporting documentation
  4. Work with your PPP lender to setup an interest-bearing escrow

In the event the PPP loan is fully satisfied, whether by being repaid in full or by the remittance of full forgiveness by the SBA, there are no restrictions on a change in ownership.

Let Aprio Help

If you are actively evaluating either acquiring or selling a company with a PPP loan, contact Chris Williamson, Senior Manager, of Aprio’s Transaction Advisory Services team to assist with understanding the implications and building a strategy for structuring the transaction.

Disclaimer for services provided relative to SBA programs and the CARES Act

Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.

The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.

Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.

You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.

In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.

Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.

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