PPP Loan Update — Changes of Ownership

Effective October 2, 2020, the Small Business Administration (SBA) released required procedures for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds. Since its inception, the PPP has been subject to various updates and changes as the COVID-19 pandemic continues to affect businesses. This new procedural notice clarifies what is considered a change in ownership and how borrowers should seek approval from either the lender or SBA.

We’ve outlined the essentials for borrowers to reference below as they explore changes in ownership and loan forgiveness.

The SBA has defined three different instances as a change in ownership:

• At least 20 percent of the common stock or other ownership interest is sold or transferred in one or more transactions following the date of the loan approval;
• At least 50 percent of the entity’s assets (measured by fair market value) are sold or transferred in one or more transactions following the date of the loan approval; or,
• The PPP borrower is merged with or into another entity.

Should a borrower pursue a change of ownership before the PPP loan is satisfied, the SBA requires the lender to be notified in writing and provided a copy of any proposed agreement before the closing of any transaction.

If, prior to closing, the PPP note is fully satisfied, there are no restrictions on the change of ownership.

In instances where the change of ownership is structured as a sale or transfer of common stock (or other ownership interest) or as a merger and the change in ownership is 50 percent or less, the lender may approve the transaction without SBA approval. This also applies to changes of ownership structured as asset sales where 50 percent or more of the assets, measured by fair market value, are to be sold.

It’s worth noting that to qualify the borrower must put an amount equal to the full amount of the loan into an interest-bearing escrow account under the lender’s control and must submit a completed forgiveness application with all supporting documentation.

If the borrower cannot meet the above requirements to allow the PPP lender to approve the transaction, the SBA must provide approval. This requirement includes changes in ownership where the loan is not fully satisfied.

To request SBA approval, the borrower must provide:

• Reasoning as to why the PPP borrower cannot fully satisfy the PPP note or escrow funds;
• Details of the requested transaction;
• A copy of the executed PPP Note; and,
• Any letter of intent and the purchase or sale agreement.

The entire Aldrich team is monitoring the PPP and SBA updates closely. We’ll be updating our PPP Resources diligently to keep you apprised of new requirements and guidance as they are released. If you have any questions about changes in ownership for your organization, reach out to your Aldrich Advisor.

This article was written with the most current information as of October 9, 2020. Please check back for future updates.

• Loan Forgiveness Relief for Small Businesses (March 2020)
• The Federal Reserve Main Street Lending Program (April 2020)
• Follow-Up Steps for Paycheck Protection Program (PPP) and Other Recent Payroll Tax Incentives (April 2020)
• Paycheck Protection Program Update — $310 Billion Added (April 2020)
• Breakdown of the PPP Loan Forgiveness Application (May 2020)
• Paycheck Protection Program Flexibility Act Signed into Law (June 2020)
• SBA Revises Paycheck Protection Program Interim Final Rules (June 2020)
• SBA Releases New PPP Loan Forgiveness FAQs (August 2020)