SBA Provides New Guidance For PPP Loan Borrower Ownership Changes


By: Paul Reuland and Colleen Lyons

October 8, 2020

Paycheck Protection Program (“PPP”) loan borrowers continue to consider their options as COVID continues to impact the economy. For some, a sale of their business is a potential option. Until last week, there was little guidance from the U.S. Small Business Administration (the “SBA”) on the approvals required in the event of a sale. On October 2nd the SBA released Procedural Notice 5000-20057 (the “Notice”) to address instances in which consent from the SBA is required prior to a PPP borrower undergoing a sale or change in ownership transaction. Under previous rules, PPP lenders were required to obtain the consent of the SBA prior to approving any change of ownership that occurred in the twelve (12) month period following the loan disbursement date. The Notice provides some clarity to parties contemplating a merger or acquisition transaction by clarifying what constitutes a “change of ownership” and granting PPP lenders unilateral authority to approve of change of ownership transactions in certain circumstances.

The Notice defines a “Change of Ownership” as (i) an aggregate change of twenty percent (20%) or more of the ownership interests in the PPP borrower since the date the borrower’s PPP loan was approved by the SBA; (ii) a sale or transfer of fifty percent (50%) or more of the PPP borrower’s assets (measured by the fair market value of the assets); or (iii) a merger of the borrower with or into another entity.

The Notice requires that, prior to closing on any Change of Ownership transaction, a borrower notify its PPP lender in writing of the proposed transaction and provide copies of the agreements or other documents underlying the transaction. Depending on the status of the PPP loan, the Change of Ownership may require approval of the PPP lender, and may also require SBA consent. The approval requirements vary depending on the status of the PPP loan.

PPP Loan Has Been Fully Repaid or Forgiven

If a borrower has repaid its PPP loan in full or received a forgiveness determination from the SBA and the forgiveness amount has been remitted to the PPP lender, no consents or approvals from the PPP lender or the SBA are required for a Change of Ownership transaction.

PPP Loan Remains Outstanding

Consent of SBA to PPP Lender Approval Not Required

For PPP loans with an outstanding balance, the Notice grants the PPP lender the unilateral authority to consent to a Change of Ownership transaction provided that:

  • the borrower has completed and submitted its forgiveness application (including all supporting documentation), and
  • an amount equal to the outstanding balance of the PPP loan has been deposited into an interest-bearing account that is controlled by the PPP lender.

In the case of a stock sale or other change in ownership interests, the PPP lender is required to report the identity of the new owners, their employer identification numbers, their ownership percentages and the location and amount of funds placed in escrow to the SBA within 5 business days of completion of the transaction.

Prior SBA Consent to PPP Lender Approval Required

Prior consent of the SBA is required for PPP lender approval of a Change of Ownership in situations where the borrower cannot satisfy the above requirements. If SBA approval is required, the PPP lender must submit a request to SBA that includes the following:

  • The reason that the PPP borrower cannot fully satisfy the PPP loan or submit its PPP application and fund an escrow account;
  • The details of the proposed transaction;
  • A copy of the executed PPP note;
  • Any letter of intent and the purchase or sale agreement setting forth the responsibilities of the transaction parties including the PPP borrower;
  • 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% or more of the purchasing entity.

In the case of a transaction involving a sale of 50% or more of the assets of a PPP borrower that requires approval of the SBA, SBA consent will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with all other PPP obligations and the SBA will require that the purchase and sale agreement include appropriate language concerning the assumption of the PPP borrower’s obligations. The SBA will seek to review and provide a determination within sixty (60) calendar days following receipt of a complete request.

Continuing Obligations of PPP Borrowers Subsequent to a Change of Ownership

Whether or not SBA approval is required, the Notice makes clear that the PPP borrower and its successors remain obligated under the PPP loan. If a new owner or successor uses PPP funds improperly, the SBA will have recourse against such new owner or successor. If, as a result of a stock sale or merger transaction, the resulting entity has multiple PPP loans, the Notice outlines responsibilities for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with the PPP requirements for each loan. Regardless of any Change of Ownership, the PPP borrower remains responsible for the PPP loan obligations, any certifications made in connection with the PPP loan application, all other applicable PPP requirements, and preparing, retaining and submitting all documentation requested by the PPP lender or the SBA.