The Small Business Administration issued new guidance for the Paycheck Protection Program on October 2 providing more certainty for market participants with respect to some of the ambiguity around the treatment of PPP loans in the M&A and investment transactions space.

The guidance mitigates some anguish surrounding M&A deals involving businesses that have received a PPP loan. The guidance expands existing lender guidelines requiring prior SBA approval under certain circumstances, including a “change of ownership” of the borrower. This important guidance means that not all mergers or acquisitions have to receive SBA approval before going forward, although the borrowers and buyers still need to adhere to specific rules.

The new guidance provided for changes of ownership of a PPP borrower, including when SBA preapproval is required, providing greater clarity for participants in M&A transactions seeking to preserve the forgiveness of the loan.

Sale of Assets or Equity Interest

The SBA defines a change of ownership as:

  1. The sale or other transfer of at least 20 percent of the common stock or other ownership of a PPP borrower, whether in one or more transactions, including to an affiliate or an existing owner of the entity
  2. The sale of other transfer of at least 50 percent of a PPP borrower’s assets
  3. The merger of a PPP borrower with or into another entity

The guidance also states that unless the seller/borrower is through the forgiveness period, has spent the proceeds and filed for forgiveness, SBA preapproval is required.

Safe Harbor on those Sales

The SBA notice includes a safe harbor, in that SBA approval isn’t required for sales or other transfers of ownership interests or mergers if the transfer is 50 percent or less of the ownership interest of the PPP borrower or the borrower submits a forgiveness application for the full use of the loan proceeds and provides supporting documentation to the lender.

An interest-bearing lender-controlled escrow account must be established with funds equal to the outstanding loan balance.

Transactions involving 50 percent or more of the borrower’s assets also don’t require SBA approval if the borrower completes the forgiveness application reflecting full use of the loan proceeds and establishes a required escrow account.

We anticipate buyers and sellers moving more quickly to apply for forgiveness with this new consent (or rather no initial consent) exception involving escrow.

For those transactions involving more than 50 percent of assets, the SBA approval will be conditioned on the purchasing entity assuming all the PPP borrower’s obligations under the PPP loan, including responsibility for compliance under the PPP loan terms.

There were some additional stipulations relating to stock sales and mergers, regardless of whether the SBA’s approval is required. The borrower or its successor in a merger remains liable for all loan obligations.

Of important notice to organizations who are structuring M&A transactions are the following:

  • Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing and provide the PPP Lender with a copy of the proposed documents that would effectuate the proposed transaction.
  • Requirements affecting borrowers vary greatly depending upon the circumstances of the change in ownership and whether or not the PPP note has been satisfied. Some changes of ownership may require the approval of the SBA prior to the completion of the transaction. The requirements may also present the taxpayer with liquidity and tax planning decisions relating to potentially escrowed funds.
  • Regardless of circumstances for a sale or transfer, the PPP borrower will remain subject to all obligations under the PPP loan. In addition, if the new owner(s) use PPP funds for unauthorized purposes, SBA will have recourse against the owner(s) for the unauthorized use.
  • If any of the new owners arising from the change in ownership have a separate PPP loan, the PPP borrower and new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to support PPP compliance for each PPP borrower.

As you can see, even though there has been some clarity, these guidance issues are complex, and the resulting compliance can directly impact your bottom line.

If you need further guidance in analyzing, structuring, negotiating and executing M&A and investment transactions involving PPP loans, make sure you are having these important conversations with your tax advisor.

Chris Burns, LBMC Tax Manager contributed to this article.