Best Practices: The Paycheck Protection Program and its Impact on Small Business Change-in-Ownership Transactions

On April 29^th, 2020, the SBA and the Department of Treasury issued additional guidance regarding the eligibility of loans to businesses which were acquired via a change in ownership transaction occurring after February 15^th, 2020.  Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were “in operation on February 15^th, 2020.” 

The new guidance clarified that where a business “in operation” on February 15^th, 2020, was later acquired via an asset purchase, stock purchase, or other qualifying change of ownership, the resulting business is still eligible to apply for a PPP loan after the closing.  

This was a particularly important explanation for lenders and small business owners who elected to proceed with change-in-ownership transactions after February 15^th, 2020, but before the majority of COVID-19 stay-at-home mandates and closures were issued in mid-to-late March or even April. 

Specifically, the guidance states that:

• the business is eligible to apply for a PPP loan regardless of the change in ownership, provided it meets other eligibility criteria;
• the business is eligible even if the change results in the assignment of a new tax ID number and even if the acquiring business was formed after February 15^th, 2020;
• the acquiring business could rely on the historic payroll costs and headcount of the pre-existing business (unless the pre-existing company had already applied for and received a PPP loan), provided pre-sale operations were maintained.

See Paycheck Protection Program Loans, FAQ #38.

While this guidance is welcome news for buyers who acquired, or intend to acquire, existing companies prior to the target company receiving PPP loan proceeds, this presents an interesting result when considering that, per SOP 50 57 and SBA Procedural Notice 5000-19009, changes to ownership of a Borrower within twelve (12) months of final disbursement of an existing SBA 7(a) loan require SBA’s prior approval. 

So, the result of the CARES Act and the additional PPP guidance may be that a buyer seeking to acquire an existing company that has already received PPP loan proceeds may not be able to do so within the first 12 months after receiving the PPP loan (unless forgiven or paid in full) without SBA’s prior approval. Lenders, Borrowers, and prospective business buyers  should beware of the potential chilling effect of this guidance on future business sales of companies that have received loan proceeds under the Paycheck Protection Program, absent additional guidance from SBA and the Department of Treasury. 

Additionally, for businesses that have obtained PPP loans or will obtain PPP loans prior to completing a change of ownership, best practices may dictate that the business receive forgiveness or repay any unforgiven amounts prior to the change of ownership in order to avoid any conflict with the SBA regulations requiring SBA’s consent.

For assistance with SBA compliance matters, contact the attorneys at Starfield & Smith, P.C. at 215.542.7070.