By Commercial

SBA Guidance for PPP Loans in M&A

Businesses contemplating a merger, acquisition, or sale of assets have been working with lenders to determine what, if any, consents may be required regarding a Paycheck Protection Program (PPP) Loan. In the absence of U.S. Small Business Administration (SBA) guidance, M&A attorneys have been structuring deals in a variety of ways to maximize their client’s comfort. Finally, on October 2, 2020, the SBA issued guidance to lenders regarding what involvement, if any, by either the SBA or the PPP lender is required when a PPP borrower undergoes a transaction resulting in a change in ownership. This guidance addresses several questions with which PPP borrowers and lenders have been struggling over the past several weeks and provides clarity around what the expectations are for when SBA consent is required and what the consent process entails. This guidance is especially applicable for PPP borrowers (and their lenders) who are contemplating equity-based financings, mergers, equity sale transactions, reorganizations, or asset sale transactions while a PPP loan remains outstanding.

The new guidance clarifies that a “change in ownership” for PPP loan purposes means:

1. at least 20% of the common stock or equity of the borrower is sold or transferred in one or more transactions (including to an affiliate or other existing owner);
2. the sale or transfer of at least 50% of the assets of the borrower in one or more transactions; and
3. the merger of the borrower with or into another entity.

If a change in ownership of a borrower occurs before either the PPP loan has been repaid in full or the PPP loan has been forgiven, with funds remitted to the PPP lender, then the prior consent of the PPP lender and, in certain circumstances the SBA, are required.

Situations where only PPP lender consent (and not SBA consent) for a change in ownership is required are as follows:

1. if the change in ownership is structured as a transfer of equity or a merger and involves the sale or transfer of 50% or less of the common stock or other ownership interest of the borrower, or
2. if prior to closing, the borrower submits a complete application for loan forgiveness and establishes an escrow account holding an amount equal to the balance of the PPP loan with the PPP lender as security for any amounts that do not receive forgiveness.

Both PPP lender and SBA consent are required for a change in ownership transaction that does not satisfy either of these criteria. To obtain SBA consent, the PPP lender must submit certain information to the SBA, including:

1. why a PPP borrower cannot repay the loan or escrow the funds;
2. the details of the transaction and a copy of the applicable letter of intent or proposed definitive agreement for the transaction setting forth the obligations of the borrower;
3. whether the buyer has an existing PPP loan; and
4. a list of all owners of 20% or more of the equity of the buyer.

The SBA guidance states that in situations where SBA consent is required, the SBA will review and provide a determination within 60 calendar days of receipt of a complete request.

Note that even in situations where only the PPP lender’s consent and not SBA consent is required prior to closing, the PPP lender is still required to provide information to the SBA regarding the transaction, including the identity of the new owners and their percentage ownership, tax ID numbers of all owners of more than 20% of the equity of the business, and the location and amount of funds in the escrow account, if required.

If your business is contemplating a change of control transaction, whether as a seller or as an acquirer, Kaufman and Canoles is ready to help. For more information, please contact Scott Seymour at (757) 624-3113 or lsseymour@kaufcan.com.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.