When an Original Borrower has received a Paycheck Protection Program (“PPP”) Loan and, prior to loan forgiveness, wishes to transfer ownership to a new purchaser, lenders often find themselves uncertain as to how to proceed. With no official guidance yet from SBA, may lenders proceed in a prudent manner by keeping program goals in mind, or should they look to “pre-covid-19 emergency” rules (the SOPs) to guide them? Much remains unknown.
When a sale of a small business takes place, such transactions are considered “changes in ownership” under SBA rules, whether an asset purchase or a stock purchase. Many prospective sellers and buyers assume that the SBA rules are not relevant to their change in ownership transaction because any PPP Loan is “non-recourse” and “forgivable.” The PPP loan is non-recourse in the sense that no personal guaranties and no collateral were required under the program. A particular loan may be forgivable to the extent that eligible uses of proceeds are, in fact, eventually forgiven. However, important considerations for any prospective buyer or seller include not only whether the PPP loan will actually be forgiven, in whole or in part, but also whether the PPP loan was properly applied for and administered by the Original PPP borrower.
If the purchase and sale agreement (“PSA”) between Buyer and Seller is drafted in a way that does not account for each party’s rights and obligations with regard to the PPP loan, serious harm could result to the seller, the buyer, the business, the original PPP lender and any new SBA 7(a) lender. The estimate of potential harm is currently playing out in real time, with essentially no guidelines or process for “PPP guaranty purchase” or how traditional guaranty purchase rules will be applied to lenders who assist in financing the new 7(a) loan.
In those transactions in which a decision on forgiveness has not yet been issued by SBA (this would apply to all such PPP loans at present), there are several considerations to keep in mind:
- Does the PSA indicate whether Buyer, Seller or both will be responsible for completing the forgiveness application and which party will bear the risk of a denial, in part or in whole, of forgiveness?
- Can a party other than the original PPP lender even review the PPP forgiveness application prior to submission to SBA?
- Between Buyer and Seller, who is in the best position to verify the accuracy of the information contained in the forgiveness application and supporting documents?
- Are a Seller’s obligations ongoing or do they terminate at closing?
- Will a Seller be around if Buyer has questions regarding the forgiveness application or if SBA or its Office of Inspector General initiates an audit or investigation of the PPP loan itself?
- Does it matter if the transaction is structured as a stock purchase or an asset purchase?
If the transaction is an asset purchase, a Seller will presumably file the forgiveness application. If however, the transaction is structured as a stock purchase, a Buyer will step into the shoes of the Original PPP borrower because there has been no change in entity. So the entity will presumably apply for forgiveness (but will the principal(s) of the Original Borrower assist and/or certify as to the truth of the original certifications?). Regardless, the PSA should contemplate all of these circumstances, which must then be agreed to by all parties.
The buyer and seller to any acquisition need to address all of these scenarios upfront, and notify the PPP lender at the earliest opportunity of the prospective sale. All affected parties should agree upon a reasonable and appropriate structure, one in which accountability should be placed on the party or parties best able to manage and assume the risk.
Sellers, in particular, should keep in mind that a failure to notify the PPP lender or to obtain SBA consent to any change in ownership may result in a technical default under the PPP loan. Any such failure may result in a denial of forgiveness, and may lead to other unforeseen consequences.
In Part 2 of this article, I will shift the focus from buyers and sellers to lenders. The article will examine the risks imposed on lenders and how they may wish to approach these transactions if formal guidance by SBA is still not available.
For assistance with general business matters, contact the attorneys at Starfield & Smith at 215.542.7070.