We are seeing more buy/sell activity in the auto industry. During the documentation phase of these transactions we’ve been advising sellers, and buyers, what should be done about outstanding PPP loans when an application for forgiveness hasn’t been submitted or approved. Our advice has been to deposit the PPP funds in escrow until the borrowing dealer receives full forgiveness. On Friday, October 2, the SBA issued Procedural Notice Control No.: 5000-20057 titled Paycheck Protection Loans and Changes in Ownership. In its notice, the SBA confirms our general thinking and outlines under what circumstances a dealer may sell their dealership and not default on their PPP Loan. It’s extremely important that dealers and their PPP lenders follow these steps in the event of a transaction where PPP forgiveness hasn’t been received. An outline of the SBAs procedural notice is as follows:
According to the SBA, for purposes of the PPP loan program, a “change in ownership” will be considered to have occurred in the following circumstances::
(1) When at least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether in one or more transactions. This includes sales to an affiliate or an existing owner of the entity.
(2) When the PPP borrower sells or otherwise transfers at least 50% of its assets (measured by fair market value), in a series of one or more transactions.
(3) When a PPP borrower is merged with or into another entity.
A borrower selling their dealership continues to be responsible for:
(1) Performance of all obligations under the PPP loan.
(2) The certifications made when the PPP loan was first obtained, including the certification of economic necessity.
(3) Compliance with all applicable PPP loan requirements.
(4) Preparing and retaining all PPP loan and supporting documents and providing this information to their lending bank or the SBA upon request.
The SBA’s procedural notice outlines under what circumstances a PPP borrower can sell their dealership, NOT receive prior consent from the SBA, and still not default on their PPP loan. To qualify, prior to closing on the sale of its dealership, a PPP borrower must notify their lender in writing of the transaction. According to the procedural notice, proper notification includes providing the lender with copies of the stock or asset purchase agreement and any other documents supporting the proposed sale.
The remaining steps for properly notifying the lender depend on the status of their PPP loan and the specifics of their transaction. Depending on whether or not your PPP loan is already fully satisfied, the following steps must be completed:
(1) PPP Note Fully Satisfied – unless you repaid your PPP loan in full, no loans qualify for this requirement because, as of this writing, no loans have been forgiven. Once the SBA begins forgiving loans, those borrowers that have completed the loan forgiveness process and the SBA has remitted funds to the PPP lender do not need prior SBA consent. In these cases, borrowers have been relieved of their obligations under the PPP program and aren’t restricted if they’d like to sell, merge or otherwise transfer ownership to another party.
(2) PPP Note NOT Fully Satisfied – as indicated before, this is currently the status of all PPP loans. If the PPP loan is not fully satisfied prior to closing the sale or transfer, then borrowers must comply with the following:
a. In certain cases, but not all, a borrower must receive prior approval from the SBA for the sale of their stock or assets.
i. Sales of stock or other ownership interest or a merger do NOT require prior consent if:
-The sale of stock or other ownership interest is of 50% or LESS of the PPP borrower.
-The PPP borrower completes a forgiveness application and submits it to the PPP lender and the PPP lender sets up an interest bearing escrow account it controls with funds equal to the outstanding PPP loan balance. The escrow balance must first be used to repay any unforgiven PPP loan balance, including interest.
ii. Similarly, if a PPP borrower sells 50% or more of its assets, then the borrower doesn’t need the prior consent of the SBA for the transaction if they complete and submit a forgiveness application, including all appropriate supporting documentation, establish an escrow account for the amount of the PPP loan. The borrower must first use any distributions from the escrow account to repay an unforgiven PPP loan balance, plus interest. The lender must also notify the SBA of the location and amount of the escrow account within 5 business days of completion of the transaction.
b. Transactions that DO need prior SBA approval are those that don’t satisfy the requirements of paragraph (2) a. above. In these cases the PPP lender may not unilaterally approve a change in ownership. Instead, the SBA Loan Servicing Center closest to the PPP borrower will consider the request. The following items must be included in these requests:
i. For a fully satisfied PPP loan (see paragraph 1. above) that has a balance owed and can’t be repaid either by the borrower or using escrowed funds, a description of why the balance cannot be satisfied must be submitted.
ii. Details of the requested transaction.
iii. A copy of the executed PPP Note.
iv. A copy of the letter of intent and purchase and sale agreement outlining the various parties responsibilities as they relate to the PPP loan.
v. Disclosure of the buyer’s PPP loan number, if applicable.
vi. A list of all shareholders owning more than 20% of the buyer.
Prior SBA approval for a sale of 50% or more of the assets of a dealership, including PPP loan funds, will be dependent on the purchaser assuming all the PPP borrowers obligations under the PPP loan program, including compliance with the PPP loans terms. Under these circumstances, the purchase and sale agreement must include language outlining these requirements and a copy must be submitted to the SBA. So far, none of the buyers or sellers we’ve advised have had this situation.
All of the sellers with whom we’ve worked are retaining their PPP loan funds and related obligations.
When prior approval from the SBA is required, the SBA will issue its determination within 60 calendar days of receipt of the request.
c. For all transactions, regardless of whether the SBA’s prior consent is required or not, the PPP borrower, as stated above, remains subject to all requirements under the PPP loan. Also, if any loan funds remain unused at the time of the ownership transfer and the new owner uses the funds for unauthorized purposes, they will be held liable by the SBA for the unauthorized use.
If the new owner received a PPP loan itself, then they are responsible for segregating their loan from the acquired entities loan and delineating the use of the loan funds and providing support for the use of the loan funds for each entity/borrower. Furthermore, the PPP lender is required to notify the appropriate SBA Loan Servicing Center of the transaction within 5 business days of completion of the transaction.
The notification must include:
i. The identity of the new owners.
ii. The new owners’ ownership percentages.
iii. The tax identification numbers for any new owners owning more than 20% of the outstanding equity.
iv. The location and amount of any required escrowed funds.
As you can see from this outline, selling a dealership that still has an outstanding PPP loan has some technical challenges to it. The challenges can be overcome, but sellers (and buyers) should be aware of their responsibilities during the drafting phase of a letter of intent, stock purchase agreement or asset purchase agreement. Not following this procedural notice could have significant implications for sellers and the ultimate success of the transaction. If you have questions about buying or selling a dealership during this time, ARB’s auto dealer team is here to help. Contact us today.
by Barton Haag, CPA