What Happens to PPP Loan When Selling a Business

The Small Business Administration (SBA) issued a Procedural Notice on October 2, 2020 which offers business owners and lenders guidance on how Paycheck Protection Program (PPP) Loans are to be handled when a business has a change in ownership.

This post summarizes the notice and includes an Infographic to assist business owners.  It includes the following topic:

• When does a Business Sale Require the SBA’s Approval
• Does a Business Sale Require the PPP Lender’s Approval or Notification
• Required Steps Pre and Post-Closing for PPP Borrowers 
• SBA Timeframe to Approve a Sale or Merger when a PPP Loan Transfers
• Does the EIDL Grant Impose Additional Steps When Selling a Business

This guidance has been long overdue.  Until now, business owners, lenders and M&A advisors have not had clear guidance about how a PPP loan should be handled when a business is sold, merged, or had a partial shareholder change of ownership.

The SBA guidance under this Procedural Notice defines “change of ownership” as when one of three events occur:

1. At least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred.  This form of business sale is considered a stock sale.  All sales and other transfers that have occurred since the date of the approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met.  Transfers to an affiliate or an existing owner of the entity must be considered as well; or
2. the PPP borrower sells or otherwise transfers at least 50% of its assets in one or more transactions; or
3.  a PPP borrower is merged with or into another entity.

When Do Business Owners with PPP Loans Not Need to Notify the SBA or Lender About a Sale?

If your business received a PPP loan and you’re considering a sale, there are three circumstances where you will not be required to involve the SBA or your lender in the process:  

1. PPP Loan Fully Satisfied Prior to Business Sale Closing 

If the PPP borrower, prior to the closing or sale, has either repaid the PPP loan in full or has completed the loan forgiveness process and the SBA has paid the PPP lender (your bank) in full, and/or the PPP borrower has repaid any remaining (unforgiven) balance in full, then no restrictions or SBA notifications are required of the PPP borrower or successor.

2. Sale or Transfer of <20% of Common Stock or Other Ownership Interest

If the sale or transfer represents less than 20% of the common stock or other ownership interest in the business, it is not considered an ownership change.  Accordingly, neither the SBA nor the lender needs to be notified.

3. Sale or Transfer of <50% of the Business’ Fair Market Value of its Assets

Similar to the sale or transfer of less than 20% of the stock or other ownership interest in the business, if the sale or transfer represents less than 50% of the business’ FMV of its assets, it is not considered a change in ownership.  Accordingly, neither the SBA nor the lender needs to be notified.

When Do Business Owners with PPP Loans Need to Involve the SBA and/or Lender in the Sale?

If you’re contemplating the sale of your business and you are not fortunate enough to fall into one of the three situations noted above, you will need to involve the SBA and/or lender in the sale process.

At a minimum, you will be required to notify your PPP lender in writing about the sale and provide the lender with a copy of the proposed purchase agreements.  

Whether you will be required to take additional steps before the closing or to obtain the SBA’s approval depends on the type of sale (stock vs asset), the amount of ownership or assets being sold, or if the transaction is a merger.

If the type of business sale is a ‘stock sale’, where 20% or more of the common stock or other form of ownership is being sold, the SBA’s approval will not be required.

If the type of business sale is an ‘asset sale’, where 50% or more of the FMV of the business’ assets is being sold, the SBA’s approval will not be required.

If the transaction is a merger with or into another entity, the SBA’s approval will not be required.

With that said, unless the sale or transfer involves between 20% but less than 50% of the common stock or other ownership interest or is less than 50% of the FMV of the assets, there are other steps the seller and buyer will need to take before the closing to address any PPP liability.  

Required Steps PPP Loan Require Pre and Post Closing When 50% or more of the Common Stock, Other Ownership Interest or FMV of the Assets are Sold or Merged

The following steps will be required:

1. Complete and submit to the PPP Loan lender the forgiveness application before the closing.
2. Establish an interest-bearing escrow account with the PPP Lender with the outstanding amount of PPP loan before the closing.
3. Upon the conclusion of the PPP loan forgiveness process, disburse the escrow fund to repay any PPP loan balance plus any applicable interest.  
4. The PPP lender must also notify  the SBA loan Servicing Center about the escrow account, its location, and amount within five business days of the closing.

SBA Approval is Required in Certain Circumstances Before Sale or Merger

When more than 50% of the ownership interest (stock, LLC member units, partnership shares) or when more than 50% of the FMV of the business’ assets are sold, the SBA will require pre-approval if the PPP note has not been paid in full and the the requirements noted above related to the escrowed fund cannot be met.  The PPP lender handles this approval process.  

The SBA’s approval of the sale or merger, under this scenario, will be conditioned on the buyer assuming all of the seller’s PPP loan obligations.  Either a separate loan assumption agreement or an inclusion of the PPP loan obligation language in the transaction’s purchase agreement will be required and reviewed by the SBA.  

The SBA has 60 calendar days to review and respond to the request.

Does Selling My Business Mean the PPP Loan Obligations Disappear?

The simple answer is ‘no’.  Regardless of the type of sale, amount of the stock or other ownership interest transferred or sold, percentage of the assets FMV transferred or sold, or whether the transaction is considered a merger, if your business’ PPP loan has an outstanding balance, the original PPP loan recipient will remain subject to all obligations under the PPP loan.  

This means as the seller of a business with an outstanding PPP loan balance, the responsibility for the PPP loan repayment, certifications, reporting compliance, and the retention of all SBA and lender forms and supporting documentation does not transfer to the buyer upon sale or merger.   

Will the Sale or Merger be Reported to the PPP Lender?

If the transaction is considered a ‘change of ownership’ according to the Procedural Notice (defined above), the PPP lender will be required to notify the SBA about the identity of the new owners, their ownership percentage, the TINs for any owner holding 20% or more of the business equity and, if required, the escrow account location and amount.

Two (or more) PPP Loans Must be Segregated Post Sale or Merger

The segregation of PPP funds is required if more than one PPP loan exists after a change in ownership or merger occurs.  This means the funds, as well as the expense records related to the loan, must be segregated and tracked to demonstrate compliance with the PPP loan’s requirements.

And in the case of a merger, the successor (business) entity will be held responsible for all of the PPP loan obligations.

Does the EIDL Grant Received by a PPP Borrower Matter When Selling a Business?

The SBA Procedural Notice was silent on the matter of the EIDL grants many business owners received.  At this time, a PPP borrower who also received an EIDL grant is responsible for repaying the EIDL grant proceeds under the PPP loan terms.  

It’s worth walking through an example to understand how the EIDL grant may affect the business sale.  If a business received a $10,000 EIDL grant as well as a PPP loan, the $10,000 EIDL grant is exempt from PPP loan forgiveness.  If the PPP lender approves the PPP loan forgiveness, the lender provides the business with a loan payment plan for the EIDL grant balance and the business would have a PPP loan balance of $10,000 on its books.  

Given the SBA’s silence on how the EIDL grants are to be handled when a business is sold, it’s implied the rules defined in the Procedural Notice apply, regardless of the relatively small remaining PPP loan balance due to receipt of an EIDL grant.  

Conclusion

When selling or merging a business, the terms of a loan from a traditional lender should be carefully reviewed and considered by all parties before the closing.  Anything less, leaves the buyer, the seller, and/or the successor in the case of a merger, open to many problems.  

Undoubtedly, it’s very important for buyers and sellers to familiarize themselves with the PPP loan rules well in advance of the anticipated closing.  Otherwise, the transaction could be held up for months.  

And for the owners of businesses with transactions involving a shift in the majority of the ownership or sale of the majority of the business’ assets fair market value, or if the loan balance is not paid off or is not available to be put aside in escrow, many will be holding their breath as they wait for the SBA’s approval to sell their businesses.