Guidance on Buying, Selling or Investing in a Business with a PPP Loan

Posted By Mike Meyer, Thursday, October 15, 2020

small business loan application

By Patrick O'Brien, JD, Legal Coordinator, American Med Spa Association

For many businesses, loans under the Paycheck Protection Program (PPP) provided a critical liquidity bridge through the early days of the pandemic. As we have reported in our prior coverage, the program's launch was not without issues, many of which were addressed as the program went on. Now, as life continues, so do more normal business operations, thus raising new questions for the PPP: What happens if I want to sell my business, buy a new location, merge, bring on an investor or generally change ownership with a PPP loan?

Because these loans had special issuance requirements and complicated eligibility rules for forgiveness, substantial changes in a business can create issues with the loan. Fortunately, the U.S. Small Businesses Administration (SBA) has assembled a helpful guide in these circumstances. The SBA considers a "change in ownership" to be transfer of 20% ownership, a sale of 50% of assets or a merger. These amounts are in aggregate starting the day the loan was approved, so it is possible to fall into these definitions with numerous small transactions as well as a single large transfer.

This SBA notice provides a number of steps and requirements in many different situations. In all cases, the borrower needs to notify the lender for approval before the transaction takes place. The ideal situation is that the loan is either fully repaid or the forgiveness is approved prior to the ownership change. In those circumstances, there are no special restrictions on the transaction. In other situations, the lender will need to provide approval and, in some cases, get the approval of the SBA prior to the transaction.

The important takeaway is that communication is key. If you have an open PPP loan and intend to make some sort of ownership change, it is critical to be in contact with your lender; they will be able to walk you through any special requirements needed due to the PPP loan. For other PPP issues and questions, both the SBA and the U.S. Department of the Treasury offer FAQs and guidance documents (see here and here). Having these loan funds forgiven is a major benefit during these difficult times, so it is important not to jeopardize that for lack of asking a question.

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