With more than 5 million Paycheck Protection Programs (PPP) loans approved, it is inevitable that some of the businesses receiving a loan would undergo a change in ownership before the loan was paid back or forgiven. Some of these transitions require consent from the Small Business Administration (SBA), which is administering the program. The SBA has issued new guidance on how changes in ownership affect a PPP loan.
SBA consent is required only when there is a change of 50% or more in entity ownership, although lenders must be notified and give consent for a change in ownership of 20% or more. If a transaction is planned that would result in a change in ownership of more than 20%, the PPP Borrower must notify the PPP lender in writing and provide the lender with a copy of the proposed agreements related to such transaction. Lenders may also have their own consent requirements, so it is advised that a PPP borrower check the terms of their promissory note.
The percentages are cumulative during the life of the loan - multiple ownership transactions could add up to reach the level that triggers notification and consent. For publicly traded companies the notification and consent requirements kick in when one individual or entity acquires a 20% ownership stake.
If the PPP loan is repaid or forgiven prior to the closing of a transaction that would trigger the consent requirement, no consent is necessary. If a transaction is planned and scheduled prior to the PPP borrower receiving loan forgiveness, the borrower must fund an interest-bearing escrow account with the PPP lender in an amount equal to the outstanding balance of the PPP loan. Upon forgiveness the funds held in escrow (minus any amount that was not forgiven) would be released to the borrower.
For ownership transactions that result in a transition of 50% or more, a request must be submitted for consent from the SBA. For asset sales the buyer must assume all obligations connected with the PPP loan. The SBA has 60 days in which to review the request for consent.
Whether or not SBA consent is required, all changes to ownership entail a requirement to fulfill all obligations of the PPP loan. If the purchasing entity is also a PPP borrower, the loans must be fully segregated, and documentation must be provided to prove compliance with PPP requirements for each separate loan.
Complying with the requirements of a PPP loan - including the tax treatment of such loans - can be complex. We encourage you to seek the advice of a qualified consultant and tax professional. For more information or assistance, please contact Gray, Gray & Gray at (781) 407.0300.