What Businesses with PPP Loans and Changes to Ownership Need to Know

Written by Dan Chodan, CPA

Businesses with an M&A transaction and a Paycheck Protection Program (PPP) Loan will likely have new requirements to satisfy.

On October 2, 2020, the Small Business Administration (SBA) released a notice for businesses that received a PPP Loan and have a change of ownership. This notice applies to M&A transactions where either:

1. 20% or more of ownership has transferred
2. 50% of the assets are sold
3. A merger occurs

If the notice applies to my business, what action needs to be taken?

Before closing a transaction, the PPP borrow must provide the lender with written notice of any ownership change. In addition, the borrower needs to provide the lender with the proposed agreements.

If the PPP loan is fully satisfied through repayment and/or forgiveness prior to closing, there are no restrictions on the M&A transaction. If the PPP loan is not fully satisfied, the borrower must either:

1. Have a transfer of 50% ownership or less approved by lender.
2. Have the M&A transaction approved by the lender, establish an escrow account to cover the loan, and submit a PPP Loan Forgiveness Application.
3. Have the M&A transaction approved by the SBA. The lender must submit this request (see items required in section 2b of the notice) and the SBA will provide a determination within 60 days. Please note, this option is only available if the borrower cannot satisfy the loan or escrow the necessary funds.

A business with an M&A transaction will likely try to have the PPP Loan forgiven quickly to avoid escrowing funds for this requirement. We recommended that PPP Loan borrowers with a M&A transaction review this notice with their lender to ensure the appropriate steps are taken.