Reading Time: 2 minutesAny Paycheck Protection Program (PPP) borrower looking at a potential change in control (via actions of the shareholders or direct action by the PPP borrower) as well as those looking to acquire control of a PPP borrower, will need to follow new guidance. Additionally, those looking to acquire control of a PPP borrower should also review the guidance.
On October 2, the SBA released Procedural Notice No. 5000-20057, establishing requirements for changes in control of PPP borrowers. Here are key takeaways from the SBA guidance:
When Does a Change in Control Occur?
- 20% of ownership is sold or transferred, including to affiliates or to existing owners,
- The borrower sells or transfers at least 50% of its assets, or
- The borrower merges with or into another entity.
What Does the Borrower Remain Responsible for?
Regardless of the structure of the transaction, borrower remains responsible for:
- All PPP loan obligations and responsibilities
- PPP certifications made on the loan application
- Compliance with all other program requirements
- Retaining all required documentation
- In case of fraud, the SBA retains all recourse options with respect to the original borrower and owners.
Specific procedures apply, depending on the type of transaction and the status of the PPP Loan. Here’s what you need to do if you’re planning to sell your business, your business’s assets, or merge with another business:
- Before the transaction: Notify the lender. Provide a written description of the transaction, and copies of all proposed documents that will be executed to effectuate the transaction.
- No other action is needed if:
- The loan has been repaid in full, or
- The PPP forgiveness process is complete and SBA has approved and sent forgiven funds (and, if applicable, the borrower has repaid any unforgiven amounts)
- If the loan has not been repaid in full or if the forgiveness process is not complete, additional steps need to be taken depending on the type of transaction.
- Generally, to avoid needing SBA’s approval for the transaction, you will need to create an escrow account for the entire outstanding loan balance, even if you’re expecting full forgiveness.
- If you’re unable to escrow sufficient funds or repay the PPP loan, SBA approval is required.
- Within five days of close, your lender must notify the SBA of the transaction details.
Post-Transaction Procedures in All Cases
Should you have questions regarding the applicability of the SBA’s PPP guidance, contact a K·Coe advisor.
- The original borrower remains subject to all PPP obligations and responsibilities.
- The successor (in case of a merger) is also subject to all obligations.
- If the new owners or successor uses funds for unauthorized purposes after close of the transaction, the SBA has recourse against the new owners.
- If other parties (buyer or successor) have a separate PPP loan:
- If an equity sale, borrower and new owners must segregate funds and demonstrate compliance by each borrower, and
- If a merger, the successor is responsible for segregating funds of each original PPP loan and demonstrate compliance by each borrower.