The COVID-19 pandemic has impacted the Chicago area economy and businesses in various ways. For some it has open the door to new opportunities to be leveraged while others have been looking for ways to survive and recover. This economic reality has led to an increase in the number of mergers and acquisitions across Chicago. A key challenge many have faced is how to address PPP loans and whether permission is needed from the Small Business Administration (SBA) or lenders during or as a result of such a transaction. The lack of guidance has led to buyers and sellers to determine independently how to proceed. To eliminate uncertainty, the SBA issued a new Procedural Notice which provides important insight into when a change of ownership occurs and the borrower’s responsibilities. The guidance clarifies requirements and is designed to be helpful to both borrowers and lenders involved in potential transactions. To help client’s prospects and others, Selden Fox has provided a summary of key points below.
Change of Ownership Definition
The guidance updates when a change of ownership has occurred for the purposes of PPP loans, which includes:
- When at least 20% of the common stock or other ownership interest of a borrower is sold or transferred, whether in one or more transactions, to a new owner, an affiliate, or an existing entity owner;
- When the PPP borrower sells or transfers at least 50% of its assets (determine by fair market value), regardless of whether it occurs in a single or multiple transaction; or,
- A PPP borrower is merged with or into another entity.
Lender Approval – Change in Ownership
A lender may provide consent when the sale or transfer is 50% or less of the borrower’s equity and for other select transactions. This includes the sale of more than 50% of ownership interest, merger, or the sale of 50% or more of the fair market value of assets. The borrower must establish an escrow account controlled by the PPP lender in the amount of the outstanding loan balance. The escrow funds must first be used to repay the remaining loan balance.
SBA Approval – Change in Ownership
The SBA must consent to transactions when a borrower sells more than 50% of assets or equity and they cannot establish the required escrow account. In these cases, the lender is required to submit the following to the SBA:
- Detailed explanation of why the loan cannot be satisfied or funds escrowed.
- Specific details of the proposed transaction.
- A copy of the executed PPP Promissory Note.
- Any letter of interest and the purchase agreement which outlined the responsibilities of the borrowers, seller, and buyer.
- The buyer’s SBA loan number if it has an existing PPP loan.
- A list of all owners which have 20% or greater equity in the purchasing entity.
Once the request for approval has been received, the SBA has 60 calendar days to review. During this time, they may decide to implement additional risk management measures before granting approval. Regarding asset sales, approval will be conditional on the buyer assuming all PPP borrower obligations including responsibility for and compliance with loan terms.
Borrower Responsibilities
Prior to the execution of any transaction, the borrower is required to notify the lender in writing about the transaction and provide copies of relevant transaction documentation. The lender is responsible to submit certain information to the SBA within five business days of transaction completion.
Regardless of the ownership change, the borrower is responsible for the continued performance of loan obligations, certifications made in the application (including economic necessity) and continued compliance with loan requirements. The borrower is also responsible for preparing and retaining all relevant loan documentation. Finally, the SBA will hold the new owners liable for unauthorized use of loan proceeds.
Contact Us
The information provided in the Procedural Notice offers important details to borrowers contemplating a transaction. While it does add another layer of complexity, it is important to be aware of responsibilities on both sides of the transaction. If you have questions about the information outlined above or need assistance relating to your PPP loan, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.
