SBA procedures for ownership changes of PPP loan recipients

The Small Business Administration (SBA) has issued a much-awaited notice clarifying the procedures for change of ownership for entities that have received Paycheck Protection Program (PPP) funds.

In sum: How are PPP loans impacting transactions? 

In clarifying the change of ownership procedures, SBA has added another layer of complexity to the timing and closing of transactions where companies have PPP funds that have not yet been repaid or forgiven. 

Per the new guidelines, SBA approval is not required for (i) minority transactions, defined as less than 50% ownership where it involves stock, or a merger, or (ii) in situations where borrowers complete forgiveness applications and escrow an amount equal to the PPP loan. 

Buyouts, which represent a larger proportion of transactions, typically include a change in control, and sellers are reluctant to escrow the necessary funds and take on the risk of forgiveness. In summary, the process presents a less-than-ideal scenario as the procedures required to execute a transaction without prior SBA approval are not ideal. 

The details: What are the SBA’s recently announced procedural changes?

For this context, the SBA notice, which was issued Oct. 2, defines a “change of ownership” as the following scenarios:

1. “At least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity,

2. “The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or

3. “A PPP borrower is merged with or into another entity.”

In all of these scenarios, the PPP borrower remains responsible for performance of all obligations under the PPP loan; certifications made in connection with the PPP loan application; compliance with other PPP requirements; and obtaining, preparing, and retaining all required PPP forms and documentation as well as providing them to the PPP lender or SBA if requested. 

The borrower also must notify the lender of the transaction – in writing, before closing – and provide a copy of the proposed agreements or other relevant documents.

If a PPP Note is fully satisfied prior to closing the sale or transfer, the PPP borrower does not face any restrictions on change of ownership. This requires that the borrower has either: 

1) “Repaid the PPP Note in full; or 

2) “Completed the loan forgiveness process in accordance with the PPP requirements and:

i. “SBA has remitted funds to the PPP Lender in full satisfaction of the PPP Note; or

ii. “The PPP borrower has repaid any remaining balance on the PPP loan.”

However, even if the PPP Note is not fully satisfied prior to closing the sale or transfer, there are still cases where SBA prior approval is not required and the PPP lender can approve the change of ownership:

  • If the change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger, the change can proceed without prior SBA approval only if 1) it concerns 50% or less of the common stock or other ownership interest of the PPP borrower; or 2) if the borrower submits to the lender a complete PPP forgiveness application showing its use of the loan proceeds, and the lender establishes and controls an interest-bearing escrow account with funds equal to the outstanding PPP loan balance, which after the forgiveness process (including any appeal of SBA’s decision) must be disbursed first to repay any remaining loan balance plus interest.
  • In cases where change of ownership is structured as an asset sale, a PPP borrower may sell 50% or more of its assets (measured by fair market value) without prior SBA approval if the above-described process of submitting a forgiveness application and establishing a lender-controlled interest-bearing escrow account is followed. As noted above, after the forgiveness process (including any appeal) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance, plus interest. “The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction,” the Notice states.

For situations where the change of ownership does not meet the previously described conditions, there is a specific process for SBA approval, detailed in the Notice. “If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction,” the Notice states. 

SBA notes that approval of changes involving 50% or more of the borrower’s assets will depend on the purchaser assuming responsibility for the borrower’s obligations, including compliance with the terms of the loan, and says that “the purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to SBA.” 

The Notice says that SBA will review and decide on all requests within 60 calendar days of receipt.

Finally, for all sales or other transfers of common stock or other ownership interest or mergers, the PPP borrower or successor to the PPP borrower is responsible for all obligations under the loan. 

If any of the new owners or the successor arising from one of these “change of ownership” transactions has their own separate PPP loan, then following consummation of the transaction, the Notice states: 

1. “In the case of a purchase or other transfer of common stock or other ownership interest, the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements by each PPP borrower.”

2. “In the case of a merger, the successor is responsible for segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance with PPP requirements with respect to both PPP loans.”


For more details, see the full Notice.

Our perspective: What does this mean for the state of transactions? 

The size of the PPP loan is a consideration in the decision-making process relating to the timing of a transaction closing. For scenarios where sellers do not want to close until the PPP Note forgiveness process is satisfied, which can result in delays upward of 90 days, some buyers view several-hundred-thousand-dollar PPP loans as incremental purchase price and factor it into the overall transaction economics. These transactions are moving forward without the necessary approvals. However, for loans approaching $1 million or more, the buyer’s view is different as the incremental purchase price is significant relative to the overall transaction economics, and we are seeing buyers reluctant to move forward. 

As businesses emerge from the initial shock of the pandemic and ramp up, sellers are revisiting deal structures and valuations, which may have turned unfavorable through the pandemic. The delayed closings resulting from PPP loans may cause sellers to rethink whether a transaction is best for them, and may leave buyers concerned that they should renegotiate deal terms. 

A further complication is the issue that PPP loan forgiveness, which is approved by SBA, carries the potential for an audit, especially for larger loans. Typical deal escrow terms do not fit the six-year period for these audits, leaving open the question of “Who carries the ultimate risk?”

One final consideration: Some businesses that struggled during the months of April – June have now emerged relatively unscathed from COVID-19. Yet, as they return to their pre-pandemic levels, they may find that entering a transaction draws extra scrutiny to their PPP loan forgiveness, particularly in transactions involving private equity. Such businesses could face the possibility that forgiveness will not be approved if SBA determines the justification for the loan and subsequent forgiveness is no longer there. 


Claudine Cohen, Managing Principal, Transactions & Turnaround Advisory


Stephanie O’Rourk, CPA, Partner, Hospitality


Subject matter expertise

  • Contact Claudine Claudine+Cohen
    Claudine Cohen

    Managing Principal, Value360 Practice

  • stephanie orourk
    Contact Stephanie Stephanie+O’Rourk
    Stephanie O’Rourk

    CPA, Partner

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