The Small Business Administration has issued guidance related to PPP loans when there is a change in ownership of the borrowing business.[1]  The notice provides for the required procedures when there is a change in ownership.

The notice defines a change in ownership as when any of the following take place:

• 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,

• 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

• A PPP borrower is merged with or into another entity.[2]

The SBA clarifies the need to look at all transfers to determine if there has been a change of ownership:

For purposes of determining a change of ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.[3]

Even with a change in ownership, the borrower still remains responsible for:

• The performance of all obligations under the PPP loan,

• The certifications made in connection with the PPP loan application, including the certification of economic necessity, and

• Compliance with all other applicable PPP requirements.[4]

As well, the SBA notes:

Additionally, the PPP borrower remains responsible for obtaining, preparing, and retaining all required PPP forms and supporting documentation and providing those forms and supporting documentation to the PPP lender or lender servicing the PPP loan (referred to as the “PPP Lender” in this Notice) or to SBA upon request.[5]

Notification Requirement

Borrowers should take note of the need to inform a lender of a change of ownership.  The notice states:

Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.[6]

Procedures Upon Change of Ownership

The SBA notes that, depending on the circumstances, different procedures will be required for a change of ownership transaction.

PPP Loan is Fully Satisfied

The SBA provides the following information related to an ownership change if the PPP loan is fully satisfied:

There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:a. Repaid the PPP Note in full; orb. Completed the loan forgiveness process in accordance with the PPP requirements and:i. SBA has remitted funds to the PPP Lender in full satisfaction of the PPP Note; orii. The PPP borrower has repaid any remaining balance on the PPP loan.[7]

PPP Note is Not Fully Satisfied – Cases Where SBA Approval is Not Required

If the note is not fully satisfied, the SBA outlines that in some cases SBA approval will be required before the ownership change takes place, while in other cases no approval is required. 

The SBA provides for the following case where no approval is required:

i. Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of SBA only if:

a) The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or

b) The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

In any of the circumstances described in a) or b) above, the procedures described in paragraph #2.c. below must also be followed.[8]

The “paragraph 2.c” items, which apply to all loans not already paid off, will be described after the next section.

The “no prior approval needed” rules continue as follows:

ii. Change of ownership is structured as an asset sale. A PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of SBA only if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction.[9]

PPP Note is Not Fully Satisfied – Cases Where SBA Approval is Required

In other cases, the approval of the SBA will be required.  The note continues:

If a change of ownership of a PPP borrower does not meet the conditions in paragraph #2.a. above, prior SBA approval of the change of ownership is required and the PPP Lender may not unilaterally approve the change of ownership.

To obtain SBA’s prior approval of requests for changes of ownership, the PPP Lender must submit the request to the appropriate SBA Loan Servicing Center. The request must include:

i. the reason that the PPP borrower cannot fully satisfy the PPP Note as described in paragraph #1 above or escrow funds as described in paragraph #2.a above;

ii. the details of the requested transaction;

iii. a copy of the executed PPP Note;

iv. any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;

v. disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

vi. a list of all owners of 20 percent or more of the purchasing entity.

If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction.

SBA approval of any change of ownership involving the sale of 50 percent or more of the assets (measured by fair market value) of a PPP borrower will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. In such cases, the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to SBA.

SBA will review and provide a determination within 60 calendar days of receipt of a complete request.[10]

Rules Applicable for all Ownership Changes, Regardless of Whether Approval is Needed

The notice provides the following steps that will apply to all ownership transfers:

In the event of a sale or other transfer of common stock or other ownership interest in the PPP borrower, or a merger of the PPP borrower with or into another entity, the PPP borrower (and, in the event of a merger of the PPP borrower into another entity, the successor to the PPP borrower) will remain subject to all obligations under the PPP loan. In addition, if the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the owner(s) for the unauthorized use.

If any of the new owners or the successor arising from such a transaction has a separate PPP loan, then, following consummation of the transaction: (1) in the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower, and (2) in the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.

The PPP Lender must notify the appropriate SBA Loan Servicing Center, within 5 business days of completion of the transaction, of the:

i. identity of the new owner(s) of the common stock or other ownership interest;

ii. new owner(s)’ ownership percentage(s);

iii. tax identification number(s) for any owner(s) holding 20 percent or more of the equity in the business; and

iv. location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.[11]

[1] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, https://www.sba.gov/sites/default/files/2020-10/5000-20057.pdf (retrieved October 2, 2020)

[2] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 1

[3] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 1

[4] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 1

[5] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 1

[6] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 2

[7] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 2

[8] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, pp. 2-3

[9] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, p. 3

[10] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, pp. 3-4

[11] SBA Procedural Notice, Paycheck Protection Program Loans and Changes of Ownership, October 2, 2020, pp. 4-5