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Overview of SBA Guidance on PPP Loans and Changes in Ownership

By Clay Glasgow, CPA, ABV, CFF, CFE, HoganTaylor Advisory Partner

On October 2, 2020, the SBA issued a Procedural Notice with guidance regarding changes in ownership of an entity that has received PPP funds. The Notice defines “change of ownership” as follows:

  1. The sale or transfer of at least 20 percent of the ownership of a PPP borrower, or
  2. The sale or transfer of at least 50 percent of the fair market value of the assets of a PPP borrower, or
  3. The merger of a PPP borrower into another entity.

The Notice stipulates an entity that received PPP funds remains responsible for 1) the performance of all obligations under the PPP, 2) all certifications made in connection with the PPP application, 3) compliance with all other PPP requirements, and 4) maintaining documentation and providing that documentation to the PPP lender or the SBA upon request. In the case of a merger of the PPP borrower into another entity, the successor to the PPP borrower will be subject to all obligations under the PPP loan.

The Notice also outlines the circumstances that require the prior approval of a change in ownership of a PPP borrower by the PPP lender and the SBA.

If the PPP note has been fully satisfied, either through repayment or completion of the forgiveness process, then there are no restrictions on a change in ownership. The forgiveness process is considered complete if the SBA has remitted funds to the lender and the borrower has repaid any remaining balance due.

For cases in which the PPP note has not been fully satisfied prior to the change in ownership, the following chart summarizes the circumstances and pre-approval requirements outlined in the Notice:

The Notice also requires that all sales and other transfers occurring since the date of the approval of the PPP loan must be aggregated in determining if the relevant thresholds have been met.

More than one PPP loan following a change in ownership or merger

If a change in ownership occurs through a sale of stock or other ownership interest, the borrower and new owner must segregate their respective PPP funds and track the spending of their respective PPP funds separately. Each borrower will need to be able to demonstrate compliance with the PPP requirements separately. In the case of a merger, the successor entity must segregate and separately track the funds to ensure compliance with respect to each PPP loan.

SBA Approval

In cases of a transfer of more than 50 percent of the ownership interest or 50 percent or more of the fair market value of assets, SBA pre-approval will be required when the PPP note has not been satisfied and the requirements for the borrower to submit a forgiveness application and establish an escrow account cannot be met. The lender is responsible for obtaining approval from the SBA, and Notice provides a list of the information that must be included with the approval request.

The Notice states that SBA approval of any change of ownership involving the sale of 50 percent or more of the fair market value of the assets will require the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. Either the purchase agreement must stipulate that the purchaser is assuming the borrower’s PPP obligations, or a separate assumption agreement may be executed and submitted to the SBA.

The SBA has 60 calendar days following the receipt of an approval request to review the information and make a determination.

Lender Responsibilities

In cases in which SBA pre-approval is not required, the Lender is required to notify the SBA within five business days following the closing of the transaction, of:

  1. The identify of the new owners and their ownership percentages
  2. Tax identification number for any owner of 20 percent or more of the equity of the business
  3. Location of, and the amount of funds in, the escrow account controlled by the lender, if required

Recap of Key Takeaways

  • Sales or transfers of less than 20 percent of the ownership units, or less than 50 percent of the fair market value of assets, are not considered changes in ownership for purposes of the PPP and do not require pre-approval by either the lender or the SBA.
  • In all cases of changes in ownership, as defined under the Notice, borrowers with outstanding PPP loan balances must notify their lender in writing and provide a copy of the transaction documents prior to closing.
  • In cases of mergers, changes of ownership of 50 percent or more, and sales of 50 percent or more of the fair market value of the borrower’s assets, the requirement for prior SBA approval can be avoided if the borrower submits its forgiveness application to the lender and establishes an escrow account controlled by the lender with funds equal to the outstanding balance of the PPP loan.
  • In all cases of a change in ownership, the original PPP borrower is responsible for all PPP obligations, certifications, and compliance, and for retaining and providing all forms and supporting documentation to the lender and/or SBA upon request.
  • In cases of a merger, the successor entity is also subject to all obligations of the PPP loan.
  • If there is more than one PPP Loan following a change in ownership or a merger, the funds related to each loan must be segregated and tracked separately so that compliance with PPP requirements can be demonstrated with respect to each loan.
  • If the conditions to avoid the SBA approval requirement cannot be met, the lender must obtain approval from the SBA prior to the change in ownership. The SBA has 60 days to review and make a determination.