Best Practices: SBA issues formal guidance on Change of Ownership Transactions involving PPP Loans but questions remain

Over the past several months, with no formal guidance in place, SBA lenders have been operating on an ad hoc basis when financing change of ownership transactions where a PPP loan is involved.  In order to assist small businesses, many lenders, adopted prudent lending practices, such as the establishment of escrow accounts, and otherwise operated in good faith based on existing guidance in SOP 50 57 2, SOP 50 10 5(K), applicable interim final rules, policy notices, and/or procedural notices as well as many iterations of “informal guidance.”  On October 2, 2020, SBA released Procedural Notice 5000-20057 (the “Notice”).  Much anticipated formal guidance concerning change of ownership transactions where a party to the transaction has received a Paycheck Protection Program (“PPP”) loan has now been provided.  However, because many questions still remain unanswered, it is recommended that lenders proceed with caution when financing change of ownership transactions involving a PPP loan.

The Notice provides a framework for processing a change of ownership transaction when a PPP note has been paid in full or when the PPP Borrower has completed the loan forgiveness process in accordance with PPP requirements.   In addition, the Notice offers guidance when a PPP note has not been paid in full and notice to SBA is permissible.   Finally, the Notice furnishes needed information when a PPP note has not been paid in full and SBA’s prior written approval is required.  Nevertheless, when the PPP note has not been fully satisfied, key questions remain.  Here are a few for lenders to consider:

• What actions, if any, should PPP lenders or SBA 7(a) lenders take for change of ownership transactions involving PPP loans that closed prior to October 2, 2020?
• For any proposed change of ownership transaction requiring SBA’s prior approval, while it is clear that lenders must furnish SBA with six mandatory items and any relevant risk mitigation measures, what does this mean? What documentation is needed from a buyer and seller to ensure SBA receives a “complete request?” What is the standard set forth in order to trigger the 60 day approval clock?
• When seeking SBA’s prior approval, will SBA review the proposed change of ownership transaction for eligibility as part of its approval process? Will the 60 day clock restart if the buyer and seller revise the purchase agreement?
• When seeking SBA’s prior approval of any change of ownership involving the sale of 50% or more of the PPP Borrower’s assets, approval will be conditioned on the purchasing entity assuming the PPP Borrower’s obligations. Is this possible if the new owner did not certify to the initial application and supporting documents? Would any party agree to assume such liability?
• In those circumstances when an interest-bearing escrow must be established, but there are inadequate proceeds from the sale to fund 100% of the PPP escrow account, will the matter require prior SBA approval?
• When the PPP note is not fully satisfied and prior SBA approval is not required, what are the consequences to a PPP lender if it fails to meet the 5 business day notice requirement to SBA?

With these and other questions remaining, the burden is on the PPP lender to obtain SBA approval (where applicable), notify SBA (where applicable), and take the steps necessary to assist its PPP borrower in effectuating a proposed change of ownership.  When the PPP note is not fully satisfied and prior SBA approval is not required, PPP lenders need to pay particular attention to obtaining all needed documentation, managing expectations around the consequences of evolving purchase agreements, establishing escrow accounts, when applicable, and furnishing notice to the appropriate Commercial Loan Servicing Center to achieve compliance.

As a practical matter, any 7(a) lender financing the change of ownership must ensure the PPP borrower (often the seller) engages with its PPP lender early in the process to avoid closing delays.  The 7(a) lender should obtain confirmation from the PPP lender that the PPP lender has complied with the requirements set forth in the Notice, while ensuring that it has followed all 7(a) loan requirements.  Ultimately, every action the PPP lender or financing 7(a) lender takes with respect to a change of ownership involving a PPP loan must be clearly documented with copies of any required SBA approval, communications or correspondence retained in file.  Follow and cite the Notice for actions taken.  If you have questions, ask.  

Whenever in doubt about a particular situation, a good rule of thumb is that lenders should always strive to protect, not only their own interests, but those of the small business concern and SBA.  Document how you have done so.  As the process moves forward, we expect SBA to address the questions posed and others regarding implementation in order to help lenders navigate these change of ownership transactions and assist America’s small businesses.  

For the latest guidance concerning PPP loans and servicing, contact the attorneys at Starfield & Smith, PC, at 215.542.7070.