Buyers’ obligation to assume PPP debt hinges on need for SBA approval

Bryan Cave Leighton Paisner
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The Small Business Administration recently published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a buyer to assume all of the PPP borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner 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 SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate 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 the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the buyer assume the PPP loan. However, this obligation is limited to circumstances in which SBA pre-approval is required.

If, instead, the buyer and seller structure the change of ownership to comply with Section 2.a.ii. of the procedural notice, then “SBA prior approval is not required” and the other conditions of Section 2.b. need not be satisfied. Accordingly, in an asset sale of at least 50% of the assets of the PPP borrower, the buyer need not assume the PPP loan so long as:

(i) the PPP borrower completes a forgiveness application reflecting the use of all of the PPP loan proceeds and submits it, together with any required supporting documentation to the PPP lender; 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 to have the escrow funds first disbursed to repay any remaining PPP loan balances following completion of the forgiveness process.

The procedural notice is indifferent to whether the buyer or seller funds such escrow account, and does not distinguish between whether any funds remaining following the completion of the repayment of the PPP loan are delivered to buyer or seller (or some combination). Those decisions remain a business decision for the parties involved in the asset transaction.

There remain many questions about the procedural notice and provisions for avoiding the need for SBA prior approval, but at least with regard to this specific question, we think the procedural notice is quite clear. So long as the forgiveness application is submitted and the escrow is established in accordance with the procedural notice, an asset buyer does not need to assume the PPP loan. In our experience, this arrangement (with the seller retaining the PPP loan … and the upside of any forgiveness) tends to more closely track the economic outcomes desired by both buyers and sellers and PPP participants.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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