If you took out a PPP loan and now you’re looking to sell the business, you’ll need to study up on how the forgiveness process affects your ability to sell well before starting the sale process. The terms and structure of the transaction will all depend on the status of your loan.
The place to start is with the Small Business Administration, the holder of your PPP debt. The SBA considers a change of ownership to occur when:
- At least 20% of the common stock or ownership interest is transferred or sold;
- 50% or more of the assets are sold or transferred;
- Your business merges with another entity.
These ownership changes typically require SBA approval, and the SBA has issued official guidance for how a sale can proceed when selling your business with PPP debt.
The following are the possible paths forward with the sale of your company:
- A simple solution is to apply for loan forgiveness as soon as possible. The PPP loan needs to be forgiven in full or to the maximum amount that will be forgiven before the change of ownership transaction closing.
- If you are selling an aggregate of 50% or less in a stock sale (since the approval of the PPP loan), you do not need to do anything and can move forward with the transaction.
- If you are selling 50% or more in an asset sale or stock sale and the loan has not been forgiven, you will need to complete the forgiveness application. An amount equal to the full amount of the PPP loan (principal plus accrued interest) should be placed in escrow until the PPP loan forgiveness application is completed. At that time, the forgiven amount, if any, can be disbursed to you, and any amount that was not forgiven can be paid off with escrow funds. Your SBA lender will have full control over these proceeds during the loan forgiveness process.
- If you cannot escrow the full amount of the PPP loan (the principal plus accrued interest), you will need to seek your SBA lender's approval, and they will submit your ownership transfer for approval to the SBA Loan Servicing Center. Following, you will need to explain why the funds required to satisfy the PPP loan cannot be escrowed. You will also be required to provide copies of the PPP loan, the PPP note, the purchase or sale agreement setting forth the responsibilities you have as the seller. And finally, you will need to disclose whether the buyer has an existing PPP loan, and a list of all owners who own more than 20% of the buying entity.
There are also conflicts with the PPP loan forgiveness and other governmental assistance programs. The CARES Act, which established the PPP, also created an Employee Retention Credit Tax Credit (ERCTC), which could be given instead of a PPP loan. As a business owner, if you chose the PPP loan but the company acquiring your business elected the ERCTC, the resulting consolidated business enterprise would be ineligible for both programs. Therefore, one loan must be abandoned. Once again, you may not be eligible for the PPP loan forgiveness, requiring the sale proceeds to be used to retire the PPP loan as it would for any other outstanding debt.
The SBA continues to work through many nuanced issues regarding PPP forgiveness. For now, their stance is to either complete the loan forgiveness process entirely before moving forward with a sale or escrow the proceeds from the sale to be used to repay the debt should the application for forgiveness be denied. PCE recommends proceeding with the loan forgiveness process as soon as it is available, so it does not hinder your company's ability to sell.