M&A Nuggets: New SBA Notice – SBA Approval of Merger May Be Required If Seller Has PPP Loan

Howard K. KurmanPrincipal, Offit│Kurman

On October 2, the United States Small Business Administration (SBA) issued a Procedural Notice detailing when SBA approval of a “change of ownership” of a seller with a PPP loan must be obtained. A change of ownership is defined as a transfer of at least 20% of the ownership, the sale of at least 50% of the assets, or the merger, of the PPP borrower.

There is no SBA approval requirement on a change of ownership if, prior to the change, the PPP loan is paid in full or the loan forgiveness process has been completed.

If the PPP loan is not fully satisfied prior to a change of ownership, then SBA approval may be required. SBA approval is not required if 1) the change of ownership is a transfer of 50% or less of the ownership of the PPP borrower or 2) the PPP borrower completes a loan forgiveness application and submits the application to the PPP lender, and an interest bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan. Similarly, a sale of more than 50% of a PPP borrower’s assets does not need SBA approval if the borrower completes a forgiveness application and establishes the escrow account.

SBA prior approval of a change of ownership is required if 1) the change of ownership is the transfer of more than 50% of the ownership or 50% of the assets of the PPP borrower, and 2) the PPP borrower does not complete a forgiveness application and establish an escrow account.

Other important points are:

  1. Any SBA approval of a sale of 50% or more of the assets of the PPP borrower is contingent on the purchaser assuming the PPP loan obligations;
  2. The SBA has 60 days to review a request for approval of a change of ownership; that time frame must therefore be accounted for in the merger process;
  3. If the seller and the purchaser have PPP loans then, after the closing of the transaction, the purchaser is responsible for “segregating and delineating” PPP funds and expenses and providing evidence that shows compliance with the PPP requirements with regard to both PPP loans; and
  4. Whether SBA approval is required, approval of the SBA lender will most likely be required.