Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
   Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
   Director, Restaurant Services
Jeremy Bronson
   Director, Accounting & Business Advisory Services

On October 2, 2020, the SBA released a procedural notice (‘Notice’) related to Paycheck Protection Program (‘PPP’) loans and changes of ownership. The Notice defines a change in ownership and, more importantly, the steps a buyer and seller must take in order to obtain approval or effect a change in ownership for a company with a PPP loan.

First, a change of ownership is defined as one of the three following situations:

  1. 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 since the date of the PPP loan approval, including to an affiliate or an existing owner of the entity;
  2. A PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or
  3. A PPP borrower is merged with or into another entity.

Regardless of the change in ownership, the PPP borrower remains responsible for all performance under the loan, the certifications made in connection with the loan (including the economic necessity), and compliance with all PPP requirements as well as completing the PPP forgiveness application with all supporting documents.

GBQ observation: The Notice specifically mentions the economic necessity clause.

Prior to closing, the PPP borrower must notify the lender in writing of any contemplated change in ownership and provide the lender with a copy of the proposed agreements or documents. There are different procedures depending on the exact circumstances of the proposed transaction, which are outlined below within the “Procedures” section.

However, there are a couple of primary points to note from the procedures:

  1. No transaction can be completed without following the procedures.
  2. If you wish to avoid having to obtain SBA approval and do not have a forgiven loan, then an escrow must be established in the amount of the loan until forgiveness is established or the loan is paid off. For companies where cash is scarce, this could create liquidity problems and/or difficulties in negotiating a successful transaction.
  3. If SBA approval is required, this can add significant time to your negotiations because the SBA has 60 days after they have a completed request to render a decision.

It should also be noted that regardless if the SBA’s prior approval is required, the borrower is still subject to all obligations under the loan. If the new owner(s) use PPP funds for unauthorized purposes, the SBA will have recourse against the owners(s) for unauthorized use.

Further, if the new owner(s) or successor(s) has its own PPP loan, then each borrower (the seller and the acquirer) is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.


If you have determined you have a change in ownership, as described above, what are the steps to be able to effect a change of ownership?

  • Is the PPP note satisfied because you either (a) paid off the note or (b) obtained forgiveness?
    • YES – Nothing more is required (assuming the lender was notified in writing as described above)
    • NO – PPP note is not satisfied in whole:
      • Do you need SBA approval to effect the change in ownership?
        • NO – if the following conditions are met:
          • Sale of common stock or other ownership interest or merger:
            • Sale/transfer is 50% or less of common stock OR
            • The borrower completes a forgiveness application and submits it with supporting documents to the lender, and the borrower establishes an interest-bearing escrow equal to the amount of the loan with the lender.
          • Change of ownership is structured as an asset sale of more than 50% of the assets:
            • The borrower completes a forgiveness application and submits it with supporting documents to the lender, and the borrower establishes an interest-bearing escrow equal to the amount of the loan with the lender.
          • YES – If you do not meet the conditions above, prior SBA approval is needed:
            • To obtain SBA approval, the lender submits the request to the appropriate SBA Lending Servicing Center on behalf of the borrower stating:
              • The reason the PPP borrower cannot fully satisfy the note or escrow funds requirement
              • Details of the transaction
              • Copy of the PPP note
              • Letter of intent and/or a draft of the purchase or sale agreement
              • Whether the buyer also has an existing PPP loan and if so, the PPP number
              • List of all owners of 20% or more of purchasing entity.
            • If deemed appropriate, the SBA can ask for additional risk mitigation procedures or additional information.
            • The SBA has 60 days after receipt of a complete request to render a decision.

If you have a PPP loan and are contemplating a transaction, following this Notice will be critical to maintaining the ability to achieve forgiveness. As always, your GBQ SBA PPP team is here to assist you with any aspect of the program or questions you may have. Contact Rebekah SmithDustin Minton, or Jeremy Bronson today.

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