What happens with your PPP loan if you sell your business?
Among all the other uncertainties of the pandemic-stricken world, a lot of business owners are finding themselves having to navigate questions and frustrations over how to deal with their PPP loan. If your business is undergoing a change of ownership, you may be even more in the dark as to how to manage this.
The Small Business Administration has recently issued information through an October 2020 Procedural Notice about what Paycheck Protection Program borrowers need to do in the case of selling their business. It’s a little bit Greek, so we’ll try to outline it in a more straightforward language.
- Notify your PPP lender. As the borrower of a PPP loan, you are obligated to notify your lender before closing on an impending transaction. Present your lender with all relevant documentation surrounding the intent of the sale.
- If you’ve fully paid off the PPP loan, or if you’ve applied for and received forgiveness for the PPP loan prior to the closing of the transaction, then you’re no longer under obligation for the loan.
If you still owe on the PPP loan prior to the sale of your business, you do not need SBA approval for the transaction, if:
- Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of SBA only if:
a) The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower3; or
b) The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. - Change of ownership is structured as an asset sale. A PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of SBA only if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction.
If the above requirements aren’t met, you will need approval from your lender for the transaction. To request approval, you will need to include with your request:
a) The reason that the PPP borrower cannot fully satisfy the PPP Note as described in paragraph #1 above or escrow funds as described in paragraph #2.a above.
b) The details of the requested transaction.
c) A copy of the executed PPP Note.
d) Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer.
e) 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 percent or more of the purchasing entity.
After the business is acquired (of course, with lender approval), the buyer of the business will then need to fulfill all obligations and responsibilities associated with the PPP loan.