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Buying a Business With a PPP Loan

December 11, 2020

In April of this year, the federal government established the Payment Protection Program (PPP) to facilitate more than 4.9 million loans for small businesses wanting to keep their employees on payroll. As the PPP permits, many borrowers have applied for and successfully obtained complete or almost complete forgiveness of their PPP loans over the last month. However, many borrowers have not yet applied for forgiveness of their PPP loans, which can create potential issues should they intend to sell all or a part of their businesses.

On October 3, the Small Business Administration (SBA) issued a procedural notice specifically focused on changes of entity ownership in businesses with PPP Loans. The latest requirements are critically important to small-business owners faced with either a need or the opportunity to change the ownership of their company before obtaining forgiveness of their PPP loan.

According to the requirements “change of ownership” includes the following:

  • “At least 20% 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% 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.”

In each of these scenarios, the PPP borrower remains responsible for performance of all obligations under the PPP loan agreement. This includes certifications made in the original PPP loan application, compliance with all PPP requirements, and maintaining all required forms and documentations, in addition to providing them to the lender and SBA, as necessary.

If the PPP loan is fully satisfied prior to closing the sale or transfer of assets, the PPP borrower may proceed with the transaction without further restriction. The federal government requires that the borrower has either “repaid the PPP note in full; or completed the loan forgiveness process in accordance with the PPP requirements and SBA has remitted funds to the PPP lender in full satisfaction of the PPP note; or the PPP borrower has repaid any remaining balance on the PPP loan.”

A borrower who has not yet received full forgiveness or fully repaid any unforgiven portion of its PPP Loan must contact its PPP Lender, in writing, to advise it of the pending change of ownership transaction. The PPP borrower must also provide the PPP lender a copy of the agreement under which the change of ownership is to occur.

But, if the PPP loan is not fully satisfied, the PPP borrower may still be able to transfer ownership without first obtaining SBA approval. Only PPP lender approval is required under the following change-of-ownership scenarios :

  • A transfer or sale of common stock (or other ownership interest)
  • An asset sale or a merger involving 50% or less of the common stock or ownership interest of the borrower
  • An asset sale, and the PPP borrower is selling 50% or more of its assets

The PPP lender may unilaterally approve IF the PPP borrower submits a complete forgiveness application to the PPP lender which demonstrates use of all of the PPP loan funds, AND the PPP borrower deposits funds equal to the outstanding balance of the PPP loan into an interest-bearing account controlled by the PPP Lender.

If a transaction doesn’t meet the above criteria for a change of ownership (e.g., greater than 50% common stock or membership interest being transferred), SBA approval for a change of ownership is required. The PPP borrower, working through its PPP lender, must submit an application for the change of ownership. The SBA has outlined what information the request must include. Know that it will be a condition for approval in these circumstances that the acquiring entity assumes all of the PPP borrower’s obligations under the PPP loan. 

Transferring your business with an outstanding PPP loan is not impossible. But, unsurprisingly, there are some additional hoops to jump through to make it happen.

If we can help you with the sale of your business, or with any SBA-related issues, let us know.

About the Author

Thomas M. Woebkenberg

Thomas M. Woebkenberg

Tom Woebkenberg practices in the firm’s Real Estate Practice Area

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