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SBA Issues Guidance to Help PPP Borrowers in M&A Activities

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Earlier this month the SBA issued a procedural notice titled “Paycheck Protection Program Loans and Changes of Ownership,” which provides some authoritative guidance on what businesses and lenders can do now with outstanding PPP loans when a transaction is being contemplated to sell company ownership or the majority of company assets. Prior to this guidance, the restrictions on changes in ownership built into the PPP loan forgiveness process has greatly complicated business negotiations in M&A transactions.

The notice establishes that for purposes of the PPP loan program and SBA approval thresholds, a “change of ownership” is considered to have occurred if any of the following occur:

  • A borrower sells 20% or more of its ownership interest (for example, common stock in a corporation or membership units in an LLC);
  • The borrower sells or transfers 50% or more of its assets at fair market value;
  • Or if a PPP borrower is merged with or into another entity.

If you are in the process of selling or acquiring a company’s ownership interests or assets, merging with another business, or contemplating such transactions within the near future (taking into account the expected timeframe for loan forgiveness), you would be wise to become familiar with this procedural notice (hereafter referred to as “the Notice”).

Here are some key takeaways from the Notice:

  • Prior to the closing of any transaction, the PPP borrower must notify the PPP lender in writing of the “contemplated transaction” and provide their lender with appropriate documents that would support the transaction.
  • If the PPP loan is paid in full before closing, the Notice provides that there are no restrictions on transactions involving the sale or transfer of an ownership interest of a PPP borrower. Alternatively, no restrictions will exist for transactions wherein the PPP borrower has completed the loan forgiveness process and the SBA has reimbursed the lender for the loan amount, or the PPP borrower has repaid any remaining balance on the PPP loan.
  • If the PPP loan is not fully satisfied prior to closing, the Notice gives borrowers some flexibility to not require SBA approval under the following circumstances:
  • If the transfer of ownership is of 50% or less of the borrower’s ownership interest or if the borrower submits a forgiveness application to the lender indicating full use of the proceeds (and supporting documentation) and an interest-bearing escrow account is established with the PPP lender with funds equal to the outstanding balance of the PPP loan.
  • For transactions structured as an asset sale involving the sale of 50% or more of the fair market value of company assets, the borrower can submit a forgiveness application reflecting full use of the loan proceeds on forgivable expenses and an interest-bearing escrow account is established with the PPP lender with funds equal to the outstanding balance of the PPP loan.

Following the forgiveness process, these escrow funds must be first used to repay any unforgiven PPP loan balances plus interest. For all other transactions, prior-approval by the SBA will be required. The Notice defines the process in fairly clear terms and specifies that the SBA will have up to 60 days to approve or deny changes in ownership.  In this process you’ll need to work with your PPP lender to submit the following information to the SBA:

  • Details of the proposed transaction, including any purchase and sale agreements, letters of intent, or relevant documents between borrowers and buyers.
  • The reason the PPP borrower cannot repay the PPP note or establish an escrow account prior to the closing of the transaction.
  • Copies of existing PPP notes, including disclosure of whether the buyer has an existing PPP loan.
  • A summary of all individuals or entities owning 20% or more of the buyer.
  • The buyer will agree to assume all obligations of the borrower’s PPP loan.

The Notice specifies that for stock sales and mergers, regardless of whether the SBA’s prior approval is required, the PPP borrower or its successor remain liable for all loan obligations, certifications, and are subject to all applicable PPP requirements established by the SBA and the originating PPP lender. Finally, the PPP lender must notify the SBA within five business days of transaction closing, and inform the SBA of the identities of new owners, new ownership percentages, tax identification numbers for new owners holding at least 20% of the company’s equity, and the location and amounts held in escrow, if applicable.

For more details of the Notice from the SBA see their posting linked here. If your business is contemplating a sale or merger and have an outstanding PPP loan, we recommend you reach out to your Berntson Porter advisor to discuss this notice and other relevant guidance.

We are expecting more interim final rulings, SBA FAQs and procedural notices, and other important guidance related to loan forgiveness in the coming weeks. We will continue to provide updates as the information is released. Berntson Porter’s PPP Forgiveness Team is available to assist you with the loan forgiveness application process – for additional information and to have one of our team members contact you, please fill out the intake form linked here.

Berntson Porter is here to help businesses navigate these challenging times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.