PPP Loan

SBA Issues Procedural Guidance for Paycheck Protection Program Borrowers Considering a Change in Control

2020, to say the least, has been a tumultuous year.  Irrespective of size and location, businesses across all industries have been impacted by the COVID-19 pandemic.  However, as eloquently stated by the infamous showman P.T. Barnum, “The show must go on.”  Now more than ever, business owners have been forced to dig deep and flex their collective resiliency muscles to forge a pathway towards economic recovery.

To assist business owners in this process, the U.S. government released the CARES Act in March 2020.  As we are all well aware, one of the most beneficial (and controversial) areas of the CARES Act has been the Paycheck Protection Program (PPP).  At its core, the PPP provided forgivable loans backed by the Small Business Administration (SBA) to qualifying small businesses, provided the funds were spent appropriately within a finite period (i.e., the Covered Period). Rife with issues and unanswered questions, many of which are beyond the scope of this article, the PPP has provided a lifeline to struggling businesses seeking to stem the coronavirus tide.

The area that will be covered in this article surrounds the impact of the PPP loans on merger & acquisition (M&A) transactions, as buyers and sellers alike have grappled with structuring concerns when PPP loans are in place.  In response to these growing concerns, the SBA released Procedural Guidance, effective October 2, 2020, for instances where a change in control has occurred for borrowers who received PPP loans.  This guidance details the steps that lenders and borrowers, in coordination with the SBA, must take prior to the consummation of an M&A transaction.  Prior to the closing of any such transaction, the borrower must provide the lender with written notification, including copies of the proposed agreements and/or other documents that would effectuate the proposed transaction.

For purposes of this procedural guidance, a change in control is deemed to have occurred under any of the following circumstances:

  1. At least 20% of the common stock or other ownership interest of a borrower is sold or transferred in one transaction, or a series of transactions; or
  2. The borrower sells or otherwise transfers at least 50% of the fair market value (FMV) of its assets; or
  3. The borrower is merged into another entity.

The procedural guidance provides specific procedures for lenders depending upon the type of ownership change contemplated by the PPP borrower.

The PPP Note is Fully Satisfied

If the PPP note is paid-off or if the loan forgiveness process has been completed prior to the closing of the transaction, there are no lender and/or SBA restrictions on the transaction.  In cases where loan forgiveness is sought, note that the SBA must have remitted the forgiven funds to the lender in order for the loan forgiveness process to be considered complete (i.e., simply having applied for loan forgiveness does not satisfy this condition).

The PPP Note is Not Fully Satisfied

If the PPP note is not fully satisfied, however, the structure of the transaction must be analyzed to determine if the lender can unilaterally approve the transaction. The following transactions may be approved by the lender without SBA pre-approval:

  • 50% or Less Threshold: Sale or other transfer of 50% or less of the common stock or other ownership interest of the borrower.
  • Greater than 50% Threshold: (1) Sale or other transfer of greater than 50% of the common stock or other ownership interest of the borrower, or (2) Sale of 50% or more of the borrower’s assets; and
    • Together with the required substantiation documentation, the borrower submits a PPP loan forgiveness application and funds an interest-bearing escrow account controlled by the lender equal to the outstanding balance of the PPP loan. The escrow funds, once the loan forgiveness process is completed, are first used to repay any principal and accrued interest on the PPP loan.
    • In the case of an asset sale meeting this criterion, the Lender has 5 business days to notify the appropriate SBA Loan Servicing Center of the amount and location of the escrow funds.

Transactions that do not meet the above criteria require SBA pre-approval prior to the consummation and may not be unilaterally approved by the lender.  In circumstances such as these, the lender must submit a request to the applicable SBA Loan Servicing Center that includes[1]:

  • The reason that the PPP borrower cannot fully satisfy the PPP Note;
  • 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 borrower, seller (if different from the 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% or more of the buyer.

The SBA will render its decision within 60 days of the receipt of the request.

Additional Restrictions and Conditions

Impacted parties considering the sale of greater than 50% of the FMV of their assets should note that in the case of transactions requiring SBA pre-approval, the buyer will be required to assume all of the seller’s PPP obligations.  Purchase and sale agreements must include the appropriate language, but borrowers may also submit a separate agreement to the SBA reflecting said language.

Impacted parties contemplating stock transactions or mergers, irrespective of whether SBA pre-approval is required, should note that the PPP borrower (and, in the event of the merger of the borrower into another entity, the successor to the PPP borrower) remains subject to all obligations under the PPP loan.  The SBA will have recourse against the former owners in situations where the new owners use the PPP funds for unauthorized purposes.

Lastly, within 5 business days of the close of the stock/other ownership interest or merger transaction, the lender must notify the appropriate SBA Loan Servicing Center of the:

  • Identity of the new owners of the common stock or other ownership interest;
  • New owner’s ownership percentage;
  • Tax identification number for any owner holding 20% or more of the equity; and
  • The location of, and the amount of funds in the escrow account.

Additional conditions also apply in situations below where the new owners or the successor entity has an existing PPP loan:

  • Stock/Other Ownership Interest Transactions: The borrower and the new owner are responsible for:
    • Segregating and delineating PPP funds and expenses; and
    • Providing documentation to demonstrate compliance with the PPP requirements on a per-borrower basis.
  • Mergers: The successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with respect to both PPP loans.

Two Worlds Collide

As the M&A and PPP worlds converge, Sax’s Transaction Advisory Services team is here to help.  Thorough planning on both the transaction side and the PPP loan forgiveness side are now more relevant and more pressing than ever.  Cash flow and timing, as well as a letter of intent and agreement considerations, will play an integral role in a successful transaction.  Contact Sax’s team of professional advisory, tax and accounting professionals for additional details.

[1] The SBA may require additional risk mitigation measures beyond those listed here as a condition of transaction approval.

 Stephen J. Ehrenberg is a Partner at Sax and a member of the firm’s Transaction Advisory Services Group and COVID-19 Recovery Task Force.  Stephen primarily focuses on the Manufacturing & Distribution and Construction industries.  He can be reached at [email protected].


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