News & Events

SBA Issues Guidance on Changes of Ownership of PPP Borrowers

On October 2, 2020, the Small Business Administration (“SBA”) issued long-awaited clarity on the procedures Paycheck Protection Program (“PPP”) borrowers, and their potential acquirors, must follow in a “change of ownership” transaction.  Procedural Notice 5000-20057 (the “Notice”) sets forth (1) what constitutes a “change of ownership” requiring SBA consent; (2) how parties may avoid the need for SBA consent; (3) the procedure for obtaining SBA consent; and (4) certain post-closing consequences for the party acquiring ownership of the PPP borrower.

What is a change of ownership?

For purposes of the Notice, a “change of ownership” is defined as any of the following transactions:

  1. The PPP borrower sells at least 20 percent of its equity interests (including to an affiliate or existing owner of the entity);
  2. The PPP borrower sells at least 50 percent of its assets (measured by fair market value);
  3. The PPP borrower merges with or into another entity.

Is SBA consent required?

The general rule is that SBA consent will be required to consummate a change of ownership transaction where the selling entity is a PPP borrower.

Consent is not required if any of the following conditions apply:

a. Equity sales/mergers:

  • The sale or transfer of equity is of 50% or less of the outstanding equity of the PPP borrower; or
  • The PPP borrower completes and files a forgiveness application, then places an amount equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender.

b. Asset sales:

  • The PPP borrower is selling less than 50 percent of its assets; or
  • The PPP borrower completes and files a forgiveness application, then places an amount equal to the outstanding balance of the PPP loan in an interest-bearing escrow account controlled by the PPP lender.

c. Full satisfaction of the PPP loan:

  • The PPP borrower has repaid the outstanding loan amount in full; or
  • The PPP borrower has completed the loan forgiveness process (including, if applicable, repaying any non-forgivable amounts).

How is consent obtained?

SBA will provide a determination within 60 calendar days of a complete request.  A complete request requires the PPP lender to submit the following information to SBA:

  1. the reason that the PPP borrower cannot fully satisfy the PPP note or otherwise escrow the funds;
  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.

Further, SBA may require “additional risk mitigation measures” as a condition of its approval of the transaction.

What are the consequences for the buyer?

In an asset sale requiring consent of SBA, the purchasing entity must assume the PPP borrower’s obligations under the PPP loan.  This assumption must be expressly set forth in the purchase agreement, or in a separate assumption agreement.

In any equity sale or merger (regardless of whether the transaction requires SBA consent), the PPP borrower remains subject to all obligations under the PPP loan.  However, the acquiring entity may be held liable to SBA for the use of PPP funds for “unauthorized purposes.”  Further, if the acquiring entity has an existing PPP loan, it is responsible for segregating and delineating PPP funds and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.

Final comments

In addition to consent from SBA as set forth in the Notice, consent may also be required by the PPP lender.  Thus, parties to a change of ownership transaction should review the loan documents and PPP note for any restrictions on a change of ownership, in addition to contacting the PPP lender to ascertain what information (if any) it may require in approving the transaction.

Further, the Notice does not address whether any borrowers who have consummated change of ownership transactions, but did not seek to obtain SBA consent, may retroactively avail themselves of these new procedures.  Similarly, the notice also does not provide the consequences for failing to obtain SBA consent (either before or after publication of the Notice), and the effect it may have on the PPP borrower’s loan forgiveness or possible successor liability on an acquiror.

If you have any questions, please contact