Even though the SBA has processed and approved a majority of the millions of PPP loan forgiveness applications it has received, many businesses continue to wait for their official forgiveness notice. For some of these businesses, the delay has no practical impact on operations. However, for businesses pursuing a sale transaction, the delay can cause angst and jeopardize the PPP loan forgiveness if the PPP borrower does not follow certain procedures.
The SBA’s Procedural Notice 50000-20057 provides guidance to PPP borrowers entering into a “change of ownership” transaction.
For PPP purposes, a “change of ownership” occurs when “(1) at least 20 percent 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, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.” All sales or transfers that have occurred since the date the PPP loan was approved must be aggregated when determining whether these thresholds have been met.
Prior to closing on any change of ownership transaction, the PPP borrower must provide its PPP lender with a notice and a copy of the proposed agreements. The PPP lender can - without SBA consent - approve the transaction in the following scenarios:
- A stock sale, merger, or asset sale where less than 50% of the PPP borrower’s stock/ownership or assets are transferred; or
- A stock sale, merger, or asset sale where more than 50% of the Borrower’s stock/ownership or assets are transferred and the PPP borrower has (i) completed and submitted a loan forgiveness application to the PPP lender, and (ii) deposited the outstanding balance of the PPP loan into an interest bearing escrow account with the PPP lender pending forgiveness.
For any change of ownership that does not meet one of these requirements, the SBA’s prior approval is required, and the PPP lender may not unilaterally approve the transaction. The SBA’s Procedural Notice does not say what happens if the foregoing requirements are not satisfied. The potential risks include denial of forgiveness and acceleration of repayment obligations.
The Business & Corporate group at McLaughlinQuinn LLC regularly represents buyers and sellers in structuring, negotiating and closing mergers, acquisitions and business sales. For more information on this newsletter or questions on how to address an unforgiven PPP loan in a business transaction, contact Jeffrey B. Cianciolo, Esq., Partner at (401) 421-5115 ext. 219 or via email at