The U.S. Small Business Administration’s guidance for companies that got Paycheck Protection Program loans and are now selling aims to keep deals flowing as borrowers await decisions on whether they’ll have debt forgiven.
The SBA issued the guidance in early October to clarify the requirements for PPP borrowers going through a change in ownership and for their lenders. The guidance “made it less foggy” and “provides a pathway” for lenders on how to handle changes in ownership for small businesses that secured a PPP loan during the pandemic, said SBA Great Lakes Regional Administrator Rob Scott.
“We were getting massive questions from the lending community and folks that want to do acquisitions,” Scott said. “During the course of an economy, there’s a lot of buying and selling of small businesses and we certainly wanted to give guidance so those folks, the lenders and the business owners can continue to do good deals.”
Working through thousands of lenders, the SBA nationally approved 5.2 million PPP loans totaling $525 billion through the end of the program on Aug. 8. In Michigan, more than 128,000 small businesses received PPP loans for $16 billion.
PPP borrowers are now seeking forgiveness for the debt, which was intended to help small businesses keep people on the payroll as the economy fell during the COVID-19 pandemic. Borrowers had to put 60 percent of the loans toward payroll expenses over a 24-week period. Lenders will review and make recommendations to the SBA on whether a PPP borrower qualifies for all or partial debt forgiveness, Scott said.
Key elements of the Oct. 2 guidance include requiring SBA consent prior to closing if a PPP borrower is going through a change in ownership. The SBA defines a change in ownership as the transfer or sale of 20 percent of a PPP borrower’s stake in the company, or the transfer or sale of 50 percent of their assets, or a merger into another entity.
Borrowers must notify their PPP lender prior to a change in ownership and provide agreements and other documents. Sellers and buyers must adhere to terms of the PPP loan and share liability for use of the funds.
The guidance provides circumstances in which lenders may approve a borrower’s sale without going to the SBA.
SBA consent is not required in instances of an ownership change that “is structured as a sale or other transfer of common stock or other ownership interest or as a merger,” or as an asset sale, according to the guidance.
That applies when half or less of the borrower’s stock or ownership interest is sold or transferred and they have submitted a loan forgiveness application that shows how the proceeds were used, or they sell half or more of the assets. A seller would have to open an escrow account to deposit proceeds from the sale equal to what’s owed on a PPP loan that would later go toward paying off the debt incurred by the buyer, should the company not receive forgiveness.
In crafting the guidance, the SBA sought to give flexibility for sellers, buyers and lenders on how to handle an outstanding PPP loan in a transaction, Scott said.
“You can’t do a one size fits all when it comes to these rules,” Scott said. “We tried to keep it flexible enough so that the lender can be flexible, and the buyer and seller can be flexible.”
‘Sorely needed’ guidance
The SBA’s guidance was “sorely needed,” said attorney Seth Ashby, a partner in the business and corporate services practice group at Varnum LLP in Grand Rapids.
Ashby has seen the issue of how to handle a PPP loan come up in a number of small business transactions.
“We have seen this situation arise countless times since the spring and summer and now heading into the fall where a PPP borrower has an opportunity to sell their business and the parties to the transaction need to determine what to do with this PPP loan,” Ashby said.
“Pretty much all PPP borrowers are in this together,” Ashby said, referring to those that may be out of a cover period, spent the loan and have submitted a forgiveness application. However, the application hasn’t been processed yet “so technically the loan is outstanding, and yet they have an opportunity to sell their business.”
Sellers typically need to secure a lender’s consent to sell when they have an outstanding debt, Ashby said. A lack of prior clarity on whether a PPP loan may get forgiven “kind of put everyone in a tight spot,” Ashby said, with many lenders reluctant to provide consent to a deal without sellers going to the SBA and a lengthy and “somewhat bureaucratic” review process.
“So, deals were getting stalled,” Ashby said. “The PPP lenders are now empowered to make these approval decisions under the right circumstances. As long as this guidance is satisfied, the SBA is telling lenders, ‘You may unilaterally approve a sale of your PPP borrower.’”
That does create a “little bit of concern” for buyers that would assume the debt in an asset deal to assure the seller adhered to the SBA guidance and requirements of the PPP loan, Ashby said.
“On the one hand, lenders ought to be empowered to approve these transactions, so that should facilitate closings when the guidance is followed,” he said. “The other side of that coin is that buyers also have an interest in ensuring that this guidance is followed and ultimately you can quantify the risk with these PPP sellers that they might not have had before.”
News coverage in the small business section of MiBiz is made possible by advertising support from the Small Business Association of Michigan. SBAM is the statewide and state-based association that focuses solely on serving the needs of Michigan’s small business community. This advertisement has no effect on editorial consideration in MiBiz.