On October 2, 2020, the Small Business Administration issued a five page Procedural Notice 5000-20057 regarding “change of ownership”. This is a very concerning topic at this point in the game as many companies have changed ownership in one form or another due to the slow-down, since receiving their PPP funding. Here is what is considered a change of ownership;
1. 20% or more of the common stock or ownership interest is sold or transferred, including to an affiliate or an existing owner of the entity,
2. 50% or more of the assets (measured by FMV) is sold or transferred, whether in one or more transactions, or
3. business is merged with or into another entity.
Before any sale takes place, the borrower must notify their PPP lender in writing of the contemplated transaction and provide them with a copy of the proposed agreement of the transaction along with other information. The SBA may then take up to 60 days to provide a determination as to the requirement of additional risk mitigation measures as a condition of the sale. Certain situations will even require the borrower to put up an escrow with the PPP lender in the amount of funds equal to the outstanding balance, until determination is later made for it to be forgiven. Yes, you read that correctly. With the number of businesses facing bankruptcy, it is unknown at this time how a Section 363 bankruptcy sale is impacted by this procedure.
If any of the three change of ownership conditions above apply to something you have done in the past six or so months since receiving PPP funding, or if you are pending a sale in the near future, then be sure to reach out to your PPP lender for guidance on the procedure.
The following applies to the sale or transfer of ownership, including to an affiliate or an existing owner of the entity.
Sale/Transfer of less than 20%
- SBA Approval Required – No
- Lender Approval Required – Possibly, check loan documents
- Escrow Required – No
- Documentation Required – Possibly, check loan documents
Sale/Transfer of 20% to 50%
- SBA Approval Required – No
- Lender Approval Required – Yes
- Escrow Required – No
- Documentation Required – Check loan documents
Sale/Transfer of greater than 50%
- SBA Approval Required – Yes
- Lender Approval Required – Yes
- Escrow Required – Yes, to avoid SBA approval
- Documentation Required
- Reason for requiring approval
- Details of pending sale/transfer
- Copy of PPP loan note
- Letter of intent and sale/transfer agreement
- Disclosure of buyers PPP loan status
- List of all greater than 20% owners
The following applies to the sale or transfer of borrowers assets (based upon Fair Market Value (FMV), including to an affiliate.
Sale/Transfer of less than 50%
- SBA Approval Required – No
- Lender Approval Required – Possibly, check loan documents
- Escrow Required – No
- Documentation Required – Possibly, check loan documents
Sale/Transfer of 50% or greater
- SBA Approval Required – Yes
- Lender Approval Required – Yes
- Escrow Required – Yes, to avoid SBA approval
- Documentation Required
- Reason for requiring approval
- Details of pending sale/transfer
- Copy of PPP loan note
- Letter of intent and sale/transfer agreement
- Disclosure of buyers PPP loan status
- List of all greater than 20% owners
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional.
