Addressing PPP loans in ownership transitions

By the end of June 2020, the U.S. Small Business Administration had approved nearly 4.9 million Paycheck Protection Program (PPP) loans. Some of the businesses that applied for those loans are either in the process of a “change in ownership” or see the current climate as an opportunity to transfer value to their heirs.

Estate tax exemptions are high, interest rates are low, and business valuations may have dipped. These are all factors that make this an opportune time to evaluate succession issues in your estate plan. It may be a good time to gift ownership interests or complete other ownership transfers.

However, businesses that took out a PPP loan may face hurdles in completing those transactions. Many PPP borrowers will need to notify their lender in advance, and some will need SBA approval before a deal can move forward.

Under SBA guidance (Procedural Notice 5000-20057), when the ownership transfer totals less than 20 percent, no special notices or approvals are required by the SBA. Borrowers should, however, check their underlying loan documents to determine whether advance notice is required by other parties.

When an ownership transfer totals between 20 percent and 50 percent, the borrower must provide their PPP lender with advance notice, including copies of the proposed agreement and transaction documentation. The guidelines stipulate the PPP lender can approve these transactions without SBA approval.

SBA approval may be required if the sale or transfer is over 50 percent of the common stock or ownership interest. In order to receive approval, the buyer will need to assume the PPP borrower’s outstanding obligations under the loan. The SBA has 60 days to review such transactions, so consider that in deal timelines.

No SBA approval is necessary if the borrower has completed a loan forgiveness application and deposited funds into an escrow account equal to the outstanding loan, pending the SBA’s determination of forgiveness.

Be aware that ownership transfer limits set by the SBA are aggregate numbers for transfers that occur during the life of your loan. That means you would still need to provide notification if you gifted 15 percent interest to a family member months before selling another 15 percent interest in a separate transaction.

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