PPP & Asset Sales: Does the Buyer Have to Take the PPP Note? | Bryan Cave Leighton Paisner
On October 2nd the Small Business Administration took place published a change of ownership procedural notice for PPP borrowers. One specific area where we have seen confusion is whether the procedural note requires that a buyer assume all obligations of the PPP borrower in an asset sale transaction. As explained below, while the procedural notice requires the buyer to assume the PPP loan obligations on an asset sale in order to obtain SBA’s prior approval, as long as SBA’s prior approval is not required, the parties are free to complete the asset transaction in a manner that makes economic sense for the parties, including leaving the PPP loan obligations with the seller.
Section 2.b. of the procedural notice indicates that in connection with obtaining the SBA’s prior approval for a change of ownership, this SBA approval “covers all obligations of the PPP borrower under the PPP loan, including responsibility for compliance with the PPP loan terms. “The procedural notification also states that the purchase or sale contract“ must contain an appropriate wording with regard to the assumption of the obligations of the PPP borrower from the PPP loan by the buying natural or legal person or that the SBA must be presented with a separate takeover contract got to”. Therefore, if prior authorization from SBA is required in connection with a change of control structured as a sale of assets, the buyer must acquire the PPP loan. However, this obligation is limited to circumstances where prior SBA approval is required.
(Note: this is a post in a Series of posts with questions about the paycheck protection program and lending. A list of the questions we have dealt with so far can also be found on our PPP resources page. These questions and our answers are based on interviews with colleagues and customers, both lenders and borrowers. Our intent is to cover topics that, while may be asked frequently, are not explicitly addressed in official FAQs or directly in the tentative final rules. Our answers may ultimately change as additional guidance is provided, but reflect our view of the regulations at the time of publication.)
If the buyer and seller instead structure the change of ownership in accordance with Section 2.a.ii. of the procedural decision, then “SBA prior approval is not required” and the other conditions of Section 2.b. doesn’t have to be satisfied. Accordingly, if there is an asset sale of at least 50% of the PPP borrower’s assets, the buyer does not have to take over the PPP loan as long as:
(i) the PPP borrower fills out a waiver application reflecting the use of all PPP loan proceeds and submits it to the PPP lender along with any required supporting documents; and
(ii) an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan, with provisions that the escrow funds are disbursed first in order to repay any remaining PPP loan balances upon completion of the waiver process.
The procedural notice does not matter whether the buyer or seller funds this escrow account and does not distinguish whether funds remaining after the PPP loan repayment is completed will be delivered to the buyer or seller (or a combination). These decisions remain a business decision for the parties involved in the asset transaction.
It stays many questions about procedural notice and provisions to avoid prior authorization by SBAbut at least on this particular issue, we think the procedural note is quite clear. As long as the application for exemption has been submitted and the trust account has been set up in accordance with the procedural decision, an asset buyer does not have to take over the PPP loan. In our experience, this arrangement (with the seller keeping the PPP loan … and the benefits of any forgiveness) more closely tracks the economic outcomes desired by buyers and sellers and PPP participants.