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SBA provides guidance on M&A transactions and PPP loan compliance

Authored by Michael Wronsky

The Small Business Administration (SBA) recently released a procedural notice that outlines the requirements Paycheck Protection Program (PPP) loan borrowers must follow when closing a change of ownership transaction. The notice defines a change in ownership for these purposes, stipulates when a transaction requires SBA approval, clarifies that the borrower remains responsible for all obligations under the loan and the related compliance requirements, and provides procedures to follow when both parties to a transaction have outstanding PPP loans.

Change in ownership defined

A change in ownership is deemed to occur when a PPP borrower:

  •  Sells or transfers 20% or more of its common stock or other ownership interest, including to an affiliate or existing owner (all transactions post-PPP loan approval must be measured in the aggregate in determining whether the 20% threshold has been met),
  •  Sells or transfers 50% or more of its assets, measured by fair market value (as above, all post-loan approval transactions must be measured in the aggregate), or
  •  Merges with or into another entity.

General requirements and SBA approval procedures

Before closing on any of the above-described transactions, the PPP borrower must notify its lender in writing and provide a copy of the proposed agreements and any other related documentation. The subsequent approval process varies, depending on the circumstances of the borrower and the proposed transaction. Neither the lender nor the SBA will place any restrictions on the transaction if prior to closing, the borrower repaid the loan in full, or the forgiveness process has been completed and the lender has received funds from the SBA, accordingly (or additionally from the borrower in the case of partial forgiveness).

If the PPP loan has not been settled, the lender can approve the transaction without approval from the SBA in the following instances:

  • If the transaction is a sale or transfer of common stock or other ownership interest, or as a merger:
    – If the sale or transfer is of 50% ownership or less, or
    – The borrower completes a forgiveness application and remits it along with the supporting documentation, and an interest-bearing escrow account is established with the lender in the amount of any unpaid proceeds.
  • If the transaction is an asset sale, the borrower must similarly complete a forgiveness application and establish an escrow account as described above.

Any change of ownership transaction not described above must be approved by the SBA before it can be effected. The lender must submit the approval request along with certain information, including the reason the borrower cannot satisfy the loan or establish an escrow account, a copy of the executed PPP note and the details of the transaction. The SBA will approve or deny the transaction within 60 calendar days from when it receives the request.

Continued responsibilities of the borrower

After a change of ownership transaction closes, the PPP loan borrower remains responsible for:

  •  The performance of all loan obligations,
  • The certifications made pursuant to the loan application,
  • Obtaining, preparing and retaining all required PPP loan forms and supporting documentation, and remitting to the lender or SBA upon request, and
  • Compliance with all other applicable PPP requirements.

When both parties have outstanding PPP loans

Broadly, in such instances, each party is responsible for segregating and delineating funds and expenses attributable to their respective PPP loans and must submit documentation to demonstrate compliance with the program as otherwise required. In the case of a merger, the successor entity bears these responsibilities. It is unclear whether the activities of one entity would impair the ability of the other to have its loan forgiven, or have a bearing on the deductibility of the associated expenses.

We encourage you to reach out to your Baker Tilly advisors with questions on how any of the above may affect your situation.  

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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