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SBA Clarifies Transfer of Ownership Rules for Businesses Receiving PPP Loans

Posted by Ann Bond, CPA on Oct 8, 2020 9:35:16 AM

There has been no shortage of questions regarding the Paycheck Protection Program (PPP) loan program funded under the CARES Act in April. Loan forgiveness has been fundamental to help keep businesses afloat during the COVID-19 pandemic. One issue that has risen to the surface concerns businesses that have a change in ownership due to merger and acquisition transactions during the loan forgiveness period. While the Small Business Administration’s (SBA) procedures regarding 7(a) loans require lenders to obtain SBA consent before approving changes in ownership of any PPP borrower, details about the need for lenders and borrowers to obtain that consent have been unclear.

On October 2, 2020, the Small Business Administration (SBA) issued guidance regarding the treatment of outstanding PPP loans concerning significant investments, mergers, and changes in ownership in M&A transactions. While this guidance sheds some light on when PPP lenders are required to gain consent from the SBA, further clarification will likely be needed for PPP borrowers.

Change of Ownership

Specifically, for purposes of the PPP, a change of ownership will be considered to have occurred as follows:

  1. When at least 20% of the common stock or other ownership interest of a PPP borrower, which includes a publicly traded entity, is sold or otherwise transferred. The change in ownership includes the sale to an affiliate or an existing owner of the entity.
  2. The PPP borrower sells or otherwise transfers at least 50% of its assets, as measured by fair market value, whether in one or more transactions.
  3. A PPP borrower is merged with or into another entity.

PPP borrowers are required to aggregate all sales and other transfers occurring since receiving PPP loan approval to determine whether the relevant threshold has been met.

Borrower Responsibilities

  • Despite a change in ownership, the PPP borrower continues to be responsible for the performance of all obligations under the loan, as well as the certifications made in connection with the PPP loan application, including the certification of economic necessity. The borrower retains responsibility for compliance with all other PPP requirements.
  • The SBA also clarifies that the borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation to the PPP lender (or lender servicing the PPP loan) or to the SBA upon request.
  • Before the closing of any change of ownership transaction, the PPP borrower is required to notify the lender in writing of the contemplated transaction and provide a copy of the proposed agreements and any other documents that would affect the proposed transaction.

Is SBA Consent Needed?

Only ownership changes of less than 20% sale of common stock or other ownership interest or asset sales of less than 50% do not need approval from either the lender or the SBA. 

Specifically, SBA consent is required for change of ownership unless one of the following criteria is satisfied:

PPP Note Is Fully Satisfied

  • There is no restriction on change of ownership as long as the PPP borrower has repaid the loan in full, or completed the loan forgiveness process in compliance with PPP requirements
  • SBA has remitted funds to the PPP lender in full satisfaction
  • PPP borrower has repaid any remaining balance on the PPP loan

Stock Sale or Merger

  • A sale of 50% or less of the borrower’s stock/ownership, or the borrower completes a loan forgiveness application that provides its use of loan proceeds
  • Must submit the application to the lender
  • Put funds equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender

Asset Sale

  • If the asset sale is 50% or more of the borrower’s assets, the PPP borrower must complete a loan forgiveness application
  • Must show borrower’s use of all loan proceeds
  • Must submit the application to the lender
  • Put funds equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender

Please note: Borrowers should always notify their lenders of pending transactions rather than wait until the completion of an ownership transaction.

When SBA approval is still required for a change in ownership, it is the lender’s responsibility to provide specific documentation to the SBA, including those relevant to the buyer and the transaction. Specifically, the PPP lender must submit the following to the SBA:

  1. The reason the borrower cannot fully satisfy the PPP note or the escrow funds
  2. Details of the proposed transaction
  3. Copy of the executed PPP note
  4. Any letter of intent and the purchase or sale agreement which indicates the responsibilities of the borrower, the seller (if different from the borrower), and the buyer
  5. Disclosure of whether the buyer has an existing PPP loan
  6. A list of all owners of 20% or more of the purchasing entity

It can take up to 60 days for the SBA to provide a decision based on these documents.

New owners are responsible for any unauthorized use of PPP loan funds and must segregate any PPP loans they already had from those they acquire.

Additional Guidance Needed

The SBA guidance focuses on when consent is needed; however, it does not address the consequences for the PPP lender and borrower for failing to do so. Some lenders have not yet opened portals for accepting applications for loan forgiveness, so some PPP borrowers are unable to submit their applications. These issues require additional clarification.

Goldin Peiser & Peiser will continue to monitor all matters related to PPP loan forgiveness to provide you with updates. Our CARE Team can help ensure you receive the maximum amount of loan forgiveness by complying with program requirements.

If you have questions about this SBA guidance or other PPP loan matters, please contact Ann Bond at 972-818-5399.

COVID-19 Resources and Planning Services

Need timely updates and helpful links to COVID-19 disaster relief programs? Visit GPP’s COVID-19 Business Assistance and Resource Center. To learn the best path forward for your business during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.

For immediate questions, email CARETEAM@GPPcpa.com

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: SBA Loans, PPP Loans, Loan Forgiveness