Current high estate tax exemption amounts, low interest rates, and decreased company valuations have many family business owners scrambling to make gifts of ownership interests or close other succession planning transactions before year end. But if the family business has an outstanding Paycheck Protection Program (PPP) loan, prior approval of the transaction from the PPP lender or the Small Business Administration is required for ownership transfers of 20 percent or more.
All ownership transfers since the approval of the PPP loan are combined to determine whether this threshold has been met. Different rules apply to asset transactions, which are less prevalent in succession planning. To help PPP borrowers, on October 2, 2020, the SBA issued guidance relating to "changes in ownership."
- A copy of the SBA's change in control guidance is available here.
- Additional information on PPP loans and the forgiveness application is available here.
For ownership transfers totaling less than 20 percent, no special PPP notice or prior approval is required. Even if notice or approval under the new guidelines is not required, borrowers should carefully review loan agreements and contracts to determine whether advance notice or approval is required from other parties.
For ownership transfers aggregating between 20 percent and 50 percent, the PPP borrower must provide the PPP lender with advance notice of the transaction, including copies of the proposed transaction documents. The new SBA guidance states that the PPP lender "may approve" the transaction, suggesting that approval by the PPP lender is necessary even if the underlying loan documents have no approval requirement. While it is hard to believe that there will be any problem obtaining such "approval" for most succession planning transactions, this does underscore the need to be in close communication with the PPP lender during this process.
The PPP lender must notify the SBA within five business days of the closing of the transaction and provide certain information regarding post-closing ownership. So, the PPP borrower must give the PPP lender prompt notice that the transaction has closed.
If the change in ownership is over 50 percent, the SBA's prior approval is necessary before the transaction may proceed. The SBA has 60 calendar days during which to review the transaction, so this time frame must be built into expectations for completing any transfers.
No prior SBA approval is required if the PPP borrower has completed its forgiveness application and, pending the SBA's determination of forgiveness, an amount equal to the outstanding balance on the PPP loan has been deposited into an escrow account under the control of the PPP lender.
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