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SBA issues guidance to PPP lenders for change of ownership transactions

Oct 3, 2020

Since the Paycheck Protection Program (“PPP”) was passed into law earlier this year, buyers, sellers and PPP lenders in corporate transactions have struggled with the question of how to address outstanding PPP loans in the context of the sale of the business. 

The PPP is a part of a Small Business Administration (“SBA”) pre-existing Section 7(a) program, and for all 7(a) loans, according to the SBA Section 7(a) Standard Operating Procedure Manual, 7(a) Lenders may not, without SBA consent, unilaterally approve any adjustment to or change in the ownership of a 7(a) borrower, including a change in percentage of ownership, for 12 months after final disbursement on any 7(a) loan. A failure to comply with this requirement could put the PPP lender’s SBA guaranty of the underlying loan at risk.

However, notwithstanding the enormous number of PPP loans made, the CARES Act and PPP-related regulations were silent on this matter, and to this point, the SBA has not clarified whether this important requirement still applies to PPP loans. 

Since most PPP loan documents (including the SBA-approved form PPP promissory note) contain some form of restrictions on changes of ownership, buyers, sellers, and PPP lenders over the last 6 months have operated under a cloud of uncertainty, triggering delays and potentially endangering the closing of many transactions. Given all this, many parties have elected to either pay off a PPP loan early or negotiate to escrow the full amount of the PPP loan proceeds with the lender, pending later determination of the PPP forgiveness amount, rather than attempt to seek SBA consent to a change of ownership transaction.

Today the SBA issued a procedural notice to all PPP lenders to provide clarity on the above issue.  According to the procedural notice, the SBA defines a “change of ownership”[1] transaction as one in which

(a) at least 20 percent 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,

(b) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or

(c) a PPP borrower is merged with or into another entity.  The SBA then proceeds to describe several paths depending on the current status of the PPP Loan.

Prior to closing of a change of ownership transaction, the PPP borrower must notify its PPP lender in writing of the contemplated transaction and provide them with copies of the acquisition documentation. Then, if prior to the closing a change of ownership transaction, a PPP loan has been repaid in full, or the  PPP borrower has completed the loan forgiveness process and the SBA has remitted funds to the PPP Lender in satisfaction of the PPP loan (or the PPP Borrower has repaid any remaining balance on the PPP Loan), there are no restrictions on a change of ownership.

If, however, the PPP loan has not been fully satisfied prior to closing, then the following applies:

  • SBA Prior Approval of a Change of Ownership is not required:
  • The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP Borrower; or
  • If the sale is of 50% or more of a PPP Borrower’s assets (measured by fair market value), or the sale is of more than 50% of the common stock or other ownership interest of the PPP Borrower, the PPP Borrower has submitted a forgiveness application reflecting its use of all of the PPP loan proceeds, to its PPP Lender, and established 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 determination, the escrowed funds must be disbursed first to repay the outstanding amount of the PPP loan. The excess, if any, may then be returned to the PPP Borrower.
  • SBA Prior Approval of a Change of Ownership is required:
  • If none of the above conditions have been met, prior SBA approval of the change of ownership is required and the PPP Lender may not unilaterally approve the change of ownership.
  • The SBA agreed to provide a determination with respect to a requested consent within 60 days of receipt of a complete request. The PPP lender must submit certain information about the proposed transaction to the SBA and the SBA reserves the right to require additional risk mitigation measures as a condition of its approval
  • For asset sales requiring consent, the SBA indicated that its approval would be expressly conditioned on the purchasing entity assuming all the PPP Borrower’s obligations under the PPP loan documents. 

Irrespective of whether SBA approval is required, for all stock sales or mergers, the acquired entity (or successor entity, with respect to mergers) will continue to remain subject to all obligations under the PPP loan. Further, if the new owners use PPP funds for unauthorized purposes, the SBA says they will have recourse against such new owners.   If the buyers or successors to a change of ownership transaction already have a separate PPP loan of their own, they are responsible for segregating and delineating PPP funds and expenses and providing the relevant documentation to demonstrate compliance by each separate borrower.

Finally, the SBA also noted that, regardless of any change of ownership, the PPP Borrower remains responsible for performance of the PPP loan, all certifications made therein (including the economic need certification) and preparing and delivering all relevant documentation for loan forgiveness or as required by the PPP loan documents.

[1] The SBA clarified that for purposes of determining a change of ownership threshold, all sales or other transfers occurring since the date of approval of the PPP Loan must be aggregated to determine whether such threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding at least 20% of the ownership interests of the borrower must be aggregated.

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