On October 2nd, the SBA issued a procedural notice addressing the banking procedures involved in changes of entity ownership for Paycheck Protection Program (PPP) loan recipients. While the notice specifically addresses lender responsibilities, insight on the associated responsibilities of business owners undergoing a change in ownership who are also PPP recipients may also be gleaned indirectly.
As it pertains to the PPP, the SBA’s notice defines a “change of ownership” as having occurred when:
- at least 20% of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity,
- the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), whether in one or more transactions, or
- a PPP borrower is merged with or into another entity.
Borrower Responsibility
Even in the event of a sale or other transfer of common stock or other ownership interest in the PPP borrower, the PPP borrower remains responsible for all applicable PPP requirements, the performance of all obligations under the PPP loan, the certifications made through the PPP loan application, as well as for obtaining, preparing, retaining, and supplying to lenders and the SBA (upon request) all required forms and supporting documentation. If the new successor or owner(s) also have a separate PPP loan, the borrower and the new owner(s) are responsible “for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.” In the event a PPP borrower is merged with or into another entity, the successor assumes all PPP responsibilities and obligations outlined above.
The notice indicates, “Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”
Procedural Matters Affecting Approval & Timing
The lending procedures and borrower’s ultimate timeline differ, depending on the circumstances of the change of ownership, such as whether the lender may solely approve the change in ownership or if the lender must first obtain the SBA’s prior approval. The SBA has promised to review and issue a determination within 60 calendar days of receiving a request.
Changes in ownership structured as they are listed below will NOT need prior SBA approval.
- a sale or other transfer of common stock or other ownership interest or as a merger whereby an individual or entity sells or otherwise transfers common stock or other ownership interest in a PPP borrower if
- The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; OR
- The borrower completes a forgiveness application reflecting the use of all of the PPP loan proceeds and submits it with any required supporting documentation to the lender, AND sets up an interest-bearing escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan.
- an asset sale if
- The sale is of 50% or more of a PPP borrower’s assets (measured by fair market value) AND the PPP Borrower
- completes a forgiveness application reflecting the use of all of the PPP loan proceeds and submits it with any required supporting documentation to the lender, AND sets up an interest-bearing escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan.
- The sale is of 50% or more of a PPP borrower’s assets (measured by fair market value) AND the PPP Borrower
Prior SBA approval WILL be required of your lender for changes in ownership structured in any other way. Consideration will, however, be based on the inclusion of certain language in borrower documents, such as letters of intent, buyer/seller agreements, or in a separate assumption agreement prepared for the SBA. Seeking professional advisory services can ensure you understand and meet all SBA requirements ahead of any changes in ownership.
Determining PPP responsibility amid a sale or transfer involves a higher level of due diligence than businesses are accustomed to in succession or M&A planning. Altus Exit Strategies, LLC (Altus), a wholly-owned subsidiary of ARB, is available to assist businesses, on the buyer side and the seller side, in conducting due diligence procedures, including those with additional PPP considerations.
Contact Us
At Altus, our professionals bring the financial consulting and tax expertise of a public accounting firm to the exit planning process. We are certified exit planning advisors (CExP) who understand the intricacies involved in successful business mergers, acquisitions, sales, and transfers. Together, with our experience collaborating with lawyers, financial advisors, and other professional advisors on behalf of business owners, we guide businesses and their exit and M&A teams through successful transactions, even in times of economic uncertainty.
If you’re in the early stages of exit planning, take a moment to examine the areas of your exit plan that need to be addressed using the Altus Exit Strategies Smart Exit Planning: Ready or Not? Assessment.
Altus and ARB are committed to keeping our clients equipped with the best resources, services, and guidance. We’re here to help our clients through every stage of business growth. Contact us today to discuss a strategy for exit planning. We also encourage you to visit ARB’s COVID-19 Financial Resource and Tax Center for additional information on related tax and financial matters.
by Holly Ferguson, CPA
