By Steven P. Lipowski and Benjamin E. Streckert
October 13, 2020
After several months of uncertainty, businesses are carefully resuming merger and acquisition transactions. Many (if not most) small businesses took advantage of the Paycheck Protection Program (PPP), but, as forgiveness is still pending, they are forced to navigate the treatment of these loans in the sale or acquisition process. The SBA issued a procedural notice regarding its requirements effective October 2, 2020.
The Notice provides the requirements a PPP borrower must meet in order to avoid losing its chance at loan forgiveness as a result of a “change of ownership.” A “change of ownership” includes: (1) a transfer of at least 20% of a borrower’s ownership interests in one or more transactions; (2) the sale of 50% of an entity’s assets in one or more transactions; and (3) the merger of a borrower into another entity. All transactions since the date the PPP loan was approved are aggregated when determining if a change of ownership has occurred.
Borrowers must notify their PPP lenders prior to the closing of any change of ownership and must provide lenders with the proposed transaction documents. Depending on the extent of the change of ownership, the structure of the transaction, and the stage of the loan forgiveness process, SBA approval may be required prior to closing. It has up to 60 days to consider a request. Even if SBA approval is not required, borrowers may be required to submit the forgiveness application and place an amount equal to the outstanding balance of the PPP loan into an escrow account to guarantee repayment of any amounts that are not forgiven. There are also specific conditions that must be met for a buyer to assume a seller’s PPP loan obligations.
Regardless of the structure, parties to a change of ownership transaction need to get their PPP lenders involved in the transaction early to avoid a delay in closing or becoming ineligible for forgiveness.
The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.
© 2021 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved.