In October 2020, the Small Business Administration (SBA) issued procedural notice 5000-20057; which, details required procedures for changes of ownership of an entity that received a Paycheck Protection Program (PPP) loan. Companies involved in potential mergers and acquisitions should consider the following aspects of the guidance:
- Definition of a Change in Ownership
- PPP Lender Disclosure
- SBA Pre-Approval
- Responsibilities of the Original PPP Borrower/Seller and Buyer
OWNERSHIP CHANGES
The SBA defines a “change of ownership” when:
- 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;
- 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;
- a PPP borrower is merged with or into another entity.
PPP LENDER DISCLOSURE
Under standard SBA loan terms, a loan is in default (and callable by the lender) if a Borrower or Operating Company reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent. 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 so that PPP Lender can notify the appropriate SBA Loan Servicing Center.
SBA PRE-APPROVAL
SBA approval is determined based on the status of the PPP loan and transaction facts. The following cases do not require approval from the SBA:
1. The PPP Note is fully satisfied if, prior to closing the sale or transfer, the PPP borrower has:
a. Repaid the PPP Note in full; or
b. Borrower completed the loan forgiveness process and:
i. SBA has remitted funds to the PPD Lender in full satisfaction of the PPP Note; or
ii. The PPP borrower has repaid any remaining balance on the PPP loan
2. Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger.
a. The sale or other transfer is 50% or less of the common stock or other ownership interest of the PPP borrower; or
b. The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds AND establishes an interest-bearing escrow account controlled by the PPP Lender with funds equal to the outstanding balance of the PPP loan.
3. Deal is structured as sale of 50 percent or more of its assets and:
a. PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds AND establishes an interest-bearing escrow account controlled by the PPP Lender with funds equal to the outstanding balance of the PPP loan.
b. The PPP Lender notifies 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.
If a change of ownership of a PPP borrower does not meet the conditions above, prior SBA approval of the change of ownership is required. To obtain SBA’s prior approval the PPP Lender must submit the request to the appropriate SBA Loan Servicing Center. The request must include:
- the reason that the PPP borrower cannot fully satisfy the PPP Note as described in paragraph #1 above or escrow funds as described in paragraph #2 or #3 above;
- the details of the requested transaction;
- a copy of the executed PPP Note;
- any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
- disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
- a list of all owners of 20 percent or more of the purchasing entity.
SBA will review and provide a determination within 60 calendar days of receipt of a complete request. SBA may require additional risk mitigation measures as a condition of its approval to an asset transaction such as the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.
For all sales or other transfers of common stock or other ownership interest or mergers, whether or not the sale requires SBA’s prior approval the PPP Lender must notify the appropriate SBA Loan Servicing Center, within 5 business days of completion of the transaction, of the:
- identity of the new owners;
- ownership percentages;
- tax identification number for any owner holding 20 percent or more of the equity in the business; and
- location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.
SELLER / BUYER RESPONSIBILITIES
Seller
- Performance of all obligations under the PPP loan,
- Certifications made in connection with the PPP loan application, including the certification of economic necessity, and
- Compliance with all other applicable PPP requirements including obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender” in this Notice) or to SBA upon request.
Buyer
- Subject to all obligations under the PPP loan.
- SBA will have recourse against the owners for the unauthorized use of PPP funds.
- Assumed responsibilities conditioned upon SBA approval of transaction
Navigating a transaction can be challenging. Adding a PPP loan into the mix of already complex due diligence activities can be cumbersome. Be sure to ask the right questions and conduct proper due diligence surrounding the terms of a targets PPP loan to alleviate any surprises post transaction.
For additional assistance regarding PPP loans and/or due diligence services or if you have questions please contact:
Matt Neuenswander, Tax Manager, Tanner LLC
801-924-5120 | mneuenswander@tannerco.com
Mark Erickson, Partner & Practice Leader – Transaction Advisory, Tanner LLC
801-924-5148 | merickson@tannerco.com
Braxton Savage, Senior Consultant – Transaction Advisory, Tanner LLC
801-924-5194 | bsavage@tannerco.com