New SBA Rules Apply to Business Acquisitions of PPP Entities (Requirements for Buyers, Sellers, and Lenders)

On October 2, the SBA issued a Procedural Notice that provides guidance for parties to an acquisition or sale of a business who also borrowed PPP funds. The notice also prescribes additional duties for lenders of related PPP loans.

In summary, the notice imposes no restrictions or additional administrative requirements on borrowers whose PPP loans already have been resolved, but it imposes varying restrictions on others, depending in part on the percentage of a company that is sold. It calls for the establishment of a new escrow account in some cases, or the formal request for permission from the SBA to consummate a transaction in others.

Who does it apply to?

In this context, the new rule affects any “change in ownership,” which includes:

  1. A sale or transfer (in one transaction, or a series of them following the date of a PPP loan’s approval) of:
    1. At least 20% of an entity’s stock or other ownership units, or
    2. At least 50% of the fair market value of an entity’s assets; or
  2. The merger of one entity into another.

Three categories

The notice separates borrowers into three levels of responsibilities, depending on a number of factors. Note, though, that regardless of the form of the transaction, the actual PPP borrower generally remains responsible for the requirements of the loan, including certification, completion of documentation, and potential repayment if not forgiven.

Note that for any “change of ownership,” as defined above, the PPP borrower must (prior to the closing of the transaction) notify the lender in writing of the planned transaction, and must provide a copy of proposed agreements and other related documents. Also, as explained later, lenders may have some notification requirements of their own following any mergers of PPP borrowers or equity transactions involving 20% of ownership.

Category #1 – limited new responsibilities

No pre-transaction requirements (other than the notification and information-providing ones applicable to any change in ownership described above) are imposed upon parties to a transaction cumulatively involving 50% or less of ownership units (in an equity deal). The same goes for entities for whom the PPP loans have been closed, meaning the lender has been repaid in full by the appropriate combination of the SBA and the borrower.

Recall that if less than 50% of the fair market value of an entity’s assets are sold (in an asset deal), the transaction does not meet the definition of an “ownership change,” and no new responsibilities are imposed. (Recall too, though, that this is a cumulative measurement.)

Borrowers whose sales exceed the thresholds described in Category #1 above fall into one of two remaining categories, depending on whether or not they are willing and able to establish an escrow account in an amount equal to the amount of the PPP loan.

Category #2 – must establish an escrow account, but do not need advance SBA permission

Those wishing to sell more than 50% of an entity’s ownership units, or 50% or more of their asset value, will not need to obtain advance permission from the SBA as long as they establish an escrow account with the PPP lender and provide the lender with a forgiveness application and all required supporting documentation. The lender in this case (not the SBA) may approve the ownership change.

The escrow account must be sufficient to cover the entire PPP loan balance, and it also must pay interest. Upon completion of the forgiveness process, the escrow must be applied first toward any unforgiven PPP loans.

Category #3 – no escrow account, but must obtain SBA permission

Borrowers planning to sell more than 50% of ownership units or 50% or more of their asset value who are unable or choose not to establish an escrow account as described above will need to receive advance permission from the SBA before completing the transaction.

The lender is not off the hook, though, as it must submit a request for a decision from the SBA on behalf of the borrower. That request must include an explanation for the reason an escrow account is not possible, details and documents related to the planned transaction and the PPP loan itself, and a list of names of the owners of 20% or more of the acquiring entity.

The SBA will review the material and provide a determination within 60 days of receiving a completed request.

Additional responsibilities following stock transactions or mergers

Regardless of the level of ownership exchanged or the applicable category above, parties to a stock transaction or a merger, and the lender of PPP funds borrowed by those parties, have some reporting and related duties.

A borrower that is acquired remains responsible for all obligations under the PPP loan. In the event of a merger, the surviving entity assumes those obligations, and inherits the legal risk of recourse from the SBA for any unauthorized use of unspent PPP funds.

If both the buyer and the seller had separate PPP loans prior to the transaction, they are each responsible for “segregating and delineating PPP funds and expenses and providing documentation to demonstrate compliance” with PPP requirements by each borrower. The successor assumes these duties in the case of a merger.

The lender, meanwhile, takes on yet more administrative duties: Within five business days of the transaction date, it must provide the SBA with the identity, ownership level, and even tax ID numbers (for 20% or more owners) of the buyers, as well as details of any escrow account necessitated by these new rules. Lenders who pledged PPP funds to secure loans under the Federal Reserve’s PPP Liquidity Facility program may have notification or other requirements as well.


The potentially forgivable PPP loan remains the flagship of the financial assistance provided by Congress in response to the pandemic. A number of restrictions were put in place regarding its qualification and use, and to prevent its abuse. This Procedural Notice is consistent with those efforts, and those business owners who are contemplating a sale or acquisition of another entity (or its assets) should become familiar with these rules. Be sure to make your PPP lender aware of the pending transaction in time to fulfill its additional administrative duties, including potential establishment of an escrow account.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Keep reading