The Paycheck Protection Program (PPP) has been a lifeline for many businesses during the Coronavirus pandemic. But for businesses in the midst of transactions, and their financial partners, the program has been a double-edged sword. Uncertainty surrounding PPP loan repayment obligations, in change of control situations, has stalled a number of pending deals.
On October 2, the US Small Business Administration (SBA) issued long-awaited guidance on the matter. A procedural notice to PPP lenders provided clarity to all parties involved in the program, and cleared the path for new deals, including employee stock ownership plan (ESOP) sales.
Borrowers who have formally satisfied their PPP notes now have a green light to complete transactions.
Either full loan repayment, or formal completion of a lender’s loan forgiveness process, lifts all PPP program restrictions on sales and transfers.
Things are more nuanced for companies with outstanding PPP loans.
For sales, mergers, or transfers of common stock and other ownership interests…
- SBA approval is not required if the change in control represents 50% or less of the PPP borrower’s ownership interest;
- If the transfer is greater than 50%, the borrower must submit a complete PPP loan forgiveness application to its lender and establish a lender-controlled, interest-bearing escrow account with funds equal to the outstanding loan balance.
For asset sales…
- SBA approval is not required if the PPP borrower sells less than 50% of its assets (measured by fair market value);
- If the asset sale is greater than 50%, the PPP borrower must submit a complete PPP loan forgiveness application to its lender and establish lender-controlled, interest-bearing escrow account with funds equal to the outstanding loan balance.
If a transaction does not meet the above criteria, SBA approval is required.
In these instances, change of ownership requests must be submitted by the PPP lender to the appropriate SBA Loan Servicing Center. Even if approval is granted, the SBA may require additional risk mitigation measures.
Regardless of the circumstances, the PPP borrower, or its successor, remains subject to all loan terms and obligations.
For complete details, please reference SBA Procedural Notice 5000-20057 (“Paycheck Protection Program Loans and Changes of Ownership”). For PPP loan forgiveness application details, consult your lender.
Please note: CSG Partners does not provide tax or legal advice. You should always seek formal guidance from your tax advisor or counsel. Our team is available as an added resource to talk you through the PPP and its implications for ESOP transactions and employee-owned companies.
Please call (212.443.5500), email (info@csgpartners.com), or schedule a meeting online.
