SBA Issues Guidance Regarding PPP Loans and Changes of Ownership

Jerad T. Whitt

On October 2, 2020, the U.S. Small Business Administration (the “SBA”) published Procedural Notice 5000-20057 (the “Procedural Notice”), which provides guidance addressing whether SBA approval is required prior to changes of ownership of companies who are borrowers under the Paycheck Protection Program (“PPP”).  Up to this point, borrowers, lenders and advisors have grappled with the lack of clear guidance regarding change of ownership rules under the PPP, with many PPP lenders taking the position that, in the absence of clear guidance otherwise, all changes of ownership or material asset sales by PPP borrowers require prior approval from the SBA.  

In a positive development for PPP borrowers, the new SBA guidance provides that certain changes in ownership do not require pre-approval from the SBA, and sets forth the procedure for seeking SBA approval when required. We anticipate that most companies will structure M&A transactions and changes of ownership in a way to avoid the requirement to obtain SBA approval. Note that even in instances where SBA pre-approval is not required, the underlying loan documents may still require prior consent from the lender, so PPP borrowers must familiarize themselves with both the requirements of the SBA guidance and their individual loan documents before proceeding with a merger, stock sale, or asset sale.

Below is a high-level summary of the Procedural Notice. The SBA may publish additional or supplemental guidance with respect to changes of ownership under the PPP, which may alter or clarify certain points. Please consult with a KMK attorney or other advisor prior to relying on the information below.

Change of Ownership Definition

For purposes of the PPP, a “change of ownership” is defined as any of the following:

  • Stock sales: at least 20% of the common stock or other ownership interests in a PPP borrower is sold or otherwise transferred, whether in one or more transactions, including to affiliates or an existing owner of the PPP borrower;
  • Asset sales: PPP borrower sells or transfers at least 50% of the fair market value of its assets; or
  • Mergers: a PPP borrower merges with or into another entity.

If a PPP borrower seeks to enter into a transaction described above prior to forgiveness and/or repayment in full of the PPP loan, the Procedural Notice requires that the borrower notify its PPP lender in writing of the proposed transaction and provide the lender with copies of the underlying transaction documents.

Change of Ownership Procedures

There are different requirements for change of ownership transactions depending on the circumstances and structure of the transaction.

There are no restrictions on a change of ownership if, prior to the sale or transfer, the PPP loan has been forgiven by the SBA or repaid in full by the borrower, but the new owner(s) of the PPP borrower are subject to all of the PPP obligations, as described in more detail below.  

If the PPP loan has not been forgiven or fully repaid prior to the change of ownership, the following rules apply:

1. SBA Pre-Approval Not Required. If the following conditions are met prior to the change of ownership, SBA pre-approval is not required (but lender approval may still be required):

  1. Sale of Less Than Majority Interest: The transaction is structured as a stock sale in which 50% or less of the total common stock or other ownership interest in the PPP borrower will be transferred; or
  2. Escrow Exception: Where the transaction is either (i) a sale of more than 50% of the PPP borrower’s common stock or other ownership interest, or (ii) a sale of 50% or more of the fair market value of the PPP borrower’s assets, and if, prior to the transaction, the PPP borrower:
    1. applies for forgiveness of the PPP loan; and
    2. deposits funds equal to the total amount outstanding under the PPP loan in an interest-bearing escrow account controlled by the PPP lender. Once the SBA has determined what portion, if any, of the PPP loan qualifies for forgiveness, the escrowed funds will be used to repay any remaining balance on the PPP loan.

In our experience, many companies involved in M&A with PPP borrowers have been escrowing funds necessary to repay any borrower PPP loan as part of the transaction’s risk allocation mechanisms. The SBA’s Escrow Exception is, in our view, a reasonable approach that we expect will be utilized in the majority of M&A transactions involving PPP borrowers going forward. Since the escrow account must be with the PPP lender, we recommend reaching out to the lender early in the M&A process to understand the process and fees and agree upon a form of escrow agreement.

2. SBA Pre-Approval is Required. Any change of ownership which does not meet the requirements described above requires prior approval from the SBA, meaning the lender cannot unilaterally approve the change of ownership. This primarily applies to instances where the PPP borrower has not applied for forgiveness and does not deposit funds in escrow to cover any outstanding PPP loan balance. To obtain SBA approval, the PPP lender (not the borrower) must submit a request for approval which must include:

  1. An explanation as to why the PPP borrower cannot satisfy either the repayment requirement or the escrow funding requirements described above;
  2. Details of the change of ownership transaction;
  3. A copy of the promissory note related to the PPP loan;
  4. A copy of the letter of intent or purchase agreement in connection with the change of ownership transaction;
  5. Disclosure of whether the potential buyer has an existing PPP loan; and
  6. A list of all owners having a 20% or more interest in the buyer.

If SBA pre-approval is required, the Procedural Notice provides that the SBA may impose additional risk mitigation measures on the change of ownership transaction as a condition of its approval. Asset sales requiring SBA pre-approval will only be approved if the purchasing entity assumes the promissory note and all of the borrower’s obligations under the PPP loan, though this requirement does not apply to the escrow exception described above.

We expect that the costs and time delays in obtaining SBA approval will lead to most companies looking to acquire a PPP borrower to require the parties to follow the escrow exception to SBA pre-approval.

Post-Change of Ownership Considerations

In the event of a stock transfer or merger, the PPP borrower (including any successor in the case of a merger) remains subject to all obligations under the PPP loan, and if the new owner uses any PPP loan funds for an unauthorized purpose, the SBA will have recourse against the owner(s) for such unauthorized use.

If a new owner or successor to the PPP borrower would have multiple PPP loans as a result of a change of ownership, the PPP borrower remains responsible for segregating and delineating PPP funds and expenses and documenting compliance with the PPP for the use of all PPP funds.

Regardless of any change of ownership, the PPP borrower remains responsible for (i) the performance of all obligations under the PPP loan (such as repayment of the loan), (ii) certifications made on the PPP loan application, and (iii) compliance with all other PPP loan requirements. Therefore, due diligence into a borrower’s PPP application and eligibility as well as appropriate PPP representations, warranties, and indemnities should still be a part of every M&A transaction involving a PPP borrower, regardless of whether the PPP loan has been repaid or forgiven.


While the PPP has helped get much needed funds into the hands of many businesses, it has also created additional complexities and administrative burden on M&A transactions involving PPP borrowers.  Both potential sellers who have outstanding PPP loans and potential buyers looking to purchase a company with an outstanding PPP loan should familiarize themselves with the SBA’s consent requirements in order to avoid pitfalls, which may include forfeiting forgiveness of PPP loans and/or liability for unauthorized use of PPP funds.  

KMK Law has M&A and commercial finance attorneys familiar with the PPP and how it impacts M&A transactions, as well as a multi-disciplinary team ready and willing to advise on such matters. For assistance, please contact a member of KMK's Business Representations Group.

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.


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