SBA Guidance for PPP Borrower Changes of Ownership

On Friday, October 2, the Small Business Administration (SBA) issued a procedural notice regarding “Paycheck Protection Program Loans and Changes of Ownership.”

As part of the CARES Act, the Paycheck Protection Program (PPP) provided relief to small businesses in need of stimulus funding in the wake of the COVID-19 pandemic.

Over five million loans from over five thousand companies representing more than $525 billion were approved with the expectation that most of that funding would be forgiven if companies can demonstrate that it was spent over a 24-week period on payroll and a few other approved expenses.

With so many individual companies participating, it is unsurprising that many of them are working through ownership changes before their loan forgiveness determination can be made.

In issuing additional guidance, the SBA has clarified the following for loan recipients as we begin the fourth quarter of 2020:

  1. A “change of ownership” has been defined to have occurred if any of the following three things have taken place:
    1. At least 20 percent of stock or interest in a PPP borrower is sold or transferred.
    2. The PPP borrower sells or transfers 50 percent or more of its assets.
    3. A PPP borrower merges with another entity.
  2. Prior to closing a change of ownership, the PPP lender must be notified in writing along with the proposed agreements and transaction documentation.
  3. The PPP lender may approve a change of ownership—without the SBA’s prior approval—for stock sales if:
    1. The sale or transfer is 50% or less of stock or interest (not applicable to an asset sale).
    2. An interest-bearing escrow account controlled by the PPP lender is funded with an amount equal to the outstanding PPP loan balance.
  4. In all other cases, the PPP borrower must obtain prior SBA approval.
  5. If the PPP Note is paid in full or the forgiveness process has been completed, there are no change of ownership restrictions.

The SBA has outlined how owners should submit prior approval requests for changes in ownership for PPP loan recipients and will make a determination within 60 calendars days.

Read the full procedural notice to learn more about the SBA’s position, or reach out to HORNE Capital for assistance.

For all the latest resources and insights to help your business navigate the changes caused by the coronavirus pandemic, check out our COVID-19 Resource Hub.