Since the beginning of the coronavirus pandemic in March, many businesses have received financial assistance in the form of a Paycheck Protection Program (“PPP”) loan. The PPP program was initially rolled out in an expedited manner due to deteriorating economic conditions and many business owners quickly signed whatever paperwork necessary to secure funding. This was motivated in large part by the government’s promise to forgive an entire PPP loan if the money was used on certain qualified expenses.
Now, the Small Business Administration (“SBA”) is only just starting to process forgiveness applications. It may be several more months before businesses find out if all or only part of their PPP loan is forgivable. In the meantime, many PPP recipients are discovering a need to transfer an ownership interest in their business—whether in the context of a sale of the company, for estate planning purposes, to compensate key employees, or otherwise.
However, the PPP loan documentation prohibits a “change of ownership” without receiving the prior written consent of the SBA. Fortunately, on October 2, 2020, the SBA released new guidance defining what exactly constitutes a change of ownership and explaining the various options available to satisfy the consent requirement.
For purposes of the PPP, a change of ownership occurs when: (1) at least 20% of the ownership interests of a PPP borrower are transferred in the aggregate since the date of approval for the PPP loan, including transfers to affiliates or existing owners; (2) the PPP borrower sells or otherwise transfers at least 50% of its assets, whether in one or more transactions; or (3) a PPP borrower is merged with or into another entity.
If you think that you may fall into one of these categories and your PPP loan has not yet either been fully forgiven or fully repaid, please consult with your PPP lender and/or an attorney prior to pursuing any transaction that is considered a change of ownership by the SBA. Failing to follow the procedures outlined by the SBA in these situations could jeopardize the forgivability of your PPP loan.
The detailed SBA guidance can be found here: https://www.sba.gov/document/procedural-notice-5000-20057-paycheck-protection-program-loans-changes-ownership.