SBA guidelines for handling PPP loans when buying or selling a business.

November 4, 2020 by Diane Loupe Buyer FAQ, Buying a Business, COVID-19, Economic News, SBA Loans, Selling a business, Small Business, Uncategorized 0 comments

Guidelines on PPP Loans When Selling a Business

Kim Eells, Senior Vice President and Small Business Administration (SBA) Business Development Officer for Georgia Primary Bank.

Kim Eells, Senior Vice President and Small Business Administration (SBA) Business Development Officer for Georgia Primary Bank, discussed new SBA guidelines on dealing with Paycheck Protection Program loans when selling a business at the Nov. 10 GABB meeting. Kim is an Affiliate Board member of GABB.

The SBA issued guidelines on Oct. 2 that provide a framework to determine whether SBA consent is necessary when selling a business or other entity that has received PPP funds.

Listen to an audio recording of Ms. Eells’ remarks at this link.

She recommended that sellers with PPP loans should ask forgiveness, a process that could take up to five months, but in practice usually takes less time. The SBA is also issuing a new form, 3508s which will make it easier for entities with PPP loans under $50,000 to apply for forgiveness.

If a business has an EIDL loan, she recommends postponing an application for PPP forgiveness.

GABB Affiliate attorney Wendy Kraby said that for the sale of a business with an SBA loan, “I am seeing the banks want to see very specific language in the Purchase Agreements detailing the requirement of an Escrow Account. The bank then wants to see that Agreement (before it is signed) to make sure it meets the bank’s requirements. Because of this, it is very important to contact the bank at the very beginning of planning for sale AND before a PSA is signed.”

Ms. Kraby described a typical provision to handle a PPP loan in a Purchase Agreement. “The Seller has taken out a Paycheck Protection Program loan in the amount of $______________with XXX Bank. Seller has completed and submitted a PPP Forgiveness Application along with all supporting documentation. At Closing, Seller shall deposit into an Interest Bearing Escrow Account controlled by XXX Bank Corporation an amount equal to the outstanding balance of the PPP loan pursuant to the Escrow Agreement, attached hereto as Exhibit “D.”

The Georgia Association of Business Brokers, or GABB, is the state’s premier organization devoted to buying and selling businesses and franchises, and operates the state’s only real estate school dedicated to business brokering. For more information about GABB, please email diane.loupe@gabb.org, call or text 404-374-3990.

“The PPP has provided 5.2 million loans worth $525 billion to American small businesses, providing critical economic relief and supporting more than 51 million jobs,” said Treasury Secretary Steven T. Mnuchin in a press release.

The SBA specifies that “There are different procedures depending on the circumstances of the change of ownership, as set forth below. In all cases, the PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.”

1.The PPP Note is fully satisfied. There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:
1. Repaid the PPP Note in full; or
2. Completed the loan forgiveness process in accordance with the PPP requirements and:
  1. SBA has remitted funds to the PPP Lender in full satisfaction of the PPP Note; or
  2. The PPP borrower has repaid any remaining balance on the PPP
The PPP Note is not fully satisfied. If the PPP Note is not fully satisfied prior to closing the sale or transfer, the following applies:
1. Cases in which SBA prior approval is not required. If the following conditions are met for (i) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger; or (ii) a change of ownership structured as an asset sale, the PPP Lender may approve the change of ownership and SBA’s prior approval is not required:
2. 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:
  1. A. The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower³; or
  2. 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.
    1. In any of the circumstances described in a) or b) above, the procedures described in paragraph #2.c. below must also be followed.
3. 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.

Cases in which SBA prior approval is required. 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:
1. 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;
2. the details of the requested transaction;
3. a copy of the executed PPP Note;
4. 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;
5. disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
6. 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.

For all sales or other transfers of common stock or other ownership interest or mergers, whether or not the sale requires SBA’s prior approval. 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:
1. identity of the new owner(s) of the common stock or other ownership interest;
2. new owner(s)’ ownership percentage(s);
3. tax identification number(s) for any owner(s) holding 20 percent or more of the equity in the business; and
4. location of, and the amount of funds in, the escrow account under the control of the PPP Lender, if an escrow account is required.

PPP Loans Pledged in Paycheck Protection Program Liquidity Facility (PPPLF)

If a PPP loan of a PPP borrower associated with a change of ownership transaction was pledged by the PPP lender to secure a loan under the Federal Reserve’s PPPLF, the lender is reminded to comply with any notification or other requirements of the PPPLF.

SBA Procedural Notice: SBA PPP Loans and Change of Ownership