• James Heller

SBA Guidance on PPP Loans and M&A Transactions

Updated: Nov 13, 2020

As the Covid-19 crisis continues to impact businesses everywhere, the CARES Act Paycheck Protection Program (“PPP”) operates to help small businesses with forgivable, low interest rate loans to help pay for payroll costs, rent, utilities, and certain other permissible expenses. Administered through the SBA, the PPP continues to evolve alongside the changing conditions of business operations in the pandemic era.

Many of our clients are interested to know how the PPP affects their continued pursuit of M&A transactions. Below is a helpful summary of the SBA’s recent publication of additional guidance intended to help PPP loan recipients when undergoing a fundamental “Change of Ownership.”

(For a broad summary of key PPP provisions, visit our “Quick Tip Sheet: SBA Paycheck Protection Program” here: https://www.fellplaw.com/post/sbappp)

Published by the SBA on October 2, 2020, SBA Procedural Notice (5000-20057) outlines rules that PPP lenders and borrowers must follow when considering a “Change of Ownership” within 12 months of the final disbursement of the borrower’s PPP loan.

(Find publication of the SBA’s procedural notice here: https://www.sba.gov/sites/default/files/2020-10/5000-20057-508.pdf)

“Change of Ownership” defined – two types of transactions to be aware of:

1. EQUITY TRANSACTIONS: either


a. at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity; or

b. a PPP borrower is merged with or into another entity.

2. ASSET TRANSACTIONS: the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions.

Implications for small businesses encountering a Change of Ownership:

Providing Notice—PPP borrowers must notify their PPP lenders in writing of the contemplated transaction, including a copy of the proposed agreements and other documents effectuating the transaction.

Procedural Requirements – should a PPP borrower decide to proceed with a Change of Ownership, different circumstances require different procedures. In all cases, the PPP Lender is required to continue submitting monthly reports to the SBA until the PPP loan is fully satisfied.

Different circumstances demand unique procedural requirements:

The PPP Note is already satisfied—where, prior to closing the sale or transfer in a Change of Ownership, a PPP borrower has either (i) repaid their loan in full, or (ii) completed the loan forgiveness process in accordance with PPP requirements, there are no restrictions on the Change of Ownership.

The PPP Note is not fully satisfied—where the PPP borrower’s loan has not yet been fully repaid, or the note is not satisfied, SBA approval (1) may not be required at all, or (2) will be required through particular request.

1. SBA APPROVAL NOT REQUIRED: a PPP lender may yet permit the Change of Ownership without approval by the SBA in either (a) Equity Transactions, or (b) Asset Transactions so long as certain conditions are met in each scenario:

a. EQUITY TRANSACTIONS: an individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without approval by the SBA only if:

i. the sale or transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or


ii. the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.


1. NOTE: After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

b. ASSET TRANSACTION: a PPP borrower may sell 50% or more of its assets without approval by the SBA only if:


i. the PPP borrower completes a forgiveness application (reflecting its use of all loan proceeds, supported by relevant documentation); and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.


1. NOTE: After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

2. SBA APPROVAL REQUIRED: where the above conditions are not satisfied, PPP lenders are required to submit a specific request to the appropriate SBA Loan Servicing Center. The request must include specifics like: (a) the reason the PPP borrower cannot fully satisfy their note or establish the required amount of escrow funds; (b) the details of the proposed transaction; (c) a copy of the executed PPP note; (d) a letter of intent accompanied by the purchase or sale agreement setting forth the respective responsibilities of the borrower-seller and buyer; (e) whether the buyer has an existing PP loan; and (f) a list of all owners of 20% or more of the purchasing entity.

Additionally, and upon discretion of the SBA, further risk mitigation measures may be required as a condition of the transaction’s approval. Moreover, Asset Sales of more than 50% will be conditioned on the purchasing entity assuming all the PPP borrower’s obligations under the loan, including responsibility for compliance with the loan terms.

Important to remember:

It is important to always remember that, regardless of any change in ownership, the PPP borrower remains responsible for (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, (3) compliance with all other applicable PPP requirements, and (4) preparing and retaining all required PPP forms and supporting documentation.

Additionally, where new owners or successors arising from a Change of Ownership already have a separate PPP loan, new owners are responsible for segregating and delineating PPP funds and/or expenses—providing documentation and demonstrating compliance along the way.

Where can I learn more?

The Treasury Department and the SBA each have websites with materials providing further details related to PPP loans. These sites are listed below.

SBA - https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp

Treasury Department - https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

For further information, contact: Chris Fonss at cpf@fellplaw.com, or Mariel Estigarribia at mie@fellplaw.com.

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