SBA Issues Guidance on Changes of Ownership for PPP Loan Borrowers

Overview

On Oct. 2, 2020, the Small Business Administration (SBA) issued Procedural Notice 5000-20057, which outlines the required notification and consent procedures for changes in ownership of borrowers of Paycheck Protection Program (PPP) loans.

• This SBA guidance provides further clarification on when SBA consent is required for a Change of Ownership with regard to PPP loans, as well as the process and timeline for that consent.
• The SBA guidance clarifies requirements and may help businesses that have been trying to go through the forgiveness process quickly because of an impending transfer of ownership.

At Smith Patrick, we are monitoring all guidance on PPP loans, and we will keep you informed.

Click here to view the SBA Guidance on PPP loans and change in ownership.

What is Considered a Change of Ownership?

The SBA Notice explains that a change of ownership transaction occurs when:

• At least 20% of common stock or other ownership interest in a PPP borrower is sold or transferred, including to an affiliate or existing owner of the entity,
• The PPP borrower sells or transfers at least 50% of its assets, measured by fair market value, or
• The PPP borrower merges with or into another entity.

SBA Consent Required for a Change in Ownership in Many Cases

Prior to the closing of a covered change of ownership transaction, the borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP loan lender with a copy of the proposed agreement or other documents that would effectuate the transaction.

Guidance for Different Change of Ownership Circumstances

PPP loan has been fully satisfied

The SBA notice states that PPP loan borrowers have no restriction on change of ownership if, prior to the closing of the sale or transfer:

• The PPP loan has been repaid in full or
• The borrower has completed the loan forgiveness process in accordance with the PPP loan requirements and
  • SBA has remitted funds to the PPP lender in full satisfaction of the PPP loan or
  • The borrower has repaid the remaining balance of the PPP loan.

PPP loan has not been fully satisfied

If the PPP loan has not been fully satisfied prior to the closing of the sale or transfer, the following requirements apply:

Equity Sale

The PPP lender may approve a change in ownership without prior SBA approval if the change of ownership is structured as a sale or transfer of common stock or other ownership interest, or as a merger and:

• The transfer or sale is 50% or less of the ownership interest, or the PPP loan borrower completes a forgiveness application reflecting its use of all of 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.

After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

Asset Sale

If the change of ownership is structured as an asset sale or sales, it will be exempt from SBA approval if it amounts to less than 50% of the borrower’s assets (measured by fair market value).

A PPP loan borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of SBA only if:

• The PPP borrower completes a forgiveness application reflecting its use of all of 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.

After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of and the amount of funds in the escrow account within 5 business days of completion of the transaction.

Obtaining SBA Consent

With the exception of the cases listed below, the PPP Loan Lender must submit a request for SBA approval to the appropriate SBA Loan Servicing Center. The SBA Notice provides a list of what these requests must include.

SBA approval “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 purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to SBA.

Timeline

SBA will review the PPP loan borrower’s request for consent to change of ownership and provide a determination within 60 calendar days after receiving a complete request.

Also note, regardless of any change, the PPP loan borrower remains responsible for performing loan obligations, PPP-related certifications and preparing and retaining all required documentation.

Read the full SBA Notice on this topic.

More Information

Our team at Smith Patrick CPAs will continue to monitor guidance issued by the SBA and keep you informed on any further information on PPP Loans. For help with your business strategy or finance needs, reach out to us at 314-961-1600 or schedule directly here to discuss your situation.

David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He and his team help businesses with PPP loans and other strategies. Reach him at 314-961-1600 or schedule directly here.

About Smith Patrick CPA

Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.