By now, it’s common knowledge among business owners that the CARES Act, as part of COVID relief established the Paycheck Protection Program (PPP) and modified the SBA’s existing Economic Injury Disaster Loan (EIDL) to help struggling business owners. Even in a typical, non-pandemic year, many companies go through a stock sale, asset sale, reorganization or outright change in ownership. With the large number of businesses that participated in these relief loans, it’s not surprising that a significant number of them are also considering going through some sort of sale or merger now. Many of these loan holders are under the impression that they cannot sell their companies until they have satisfied the loan. The truth is that most sales just require notice or approval. We have summarized the guidelines for when permission is required and what procedure to follow.
Business Sales Where SBA or Lender Approval is Not Needed
There are 3 scenarios where you are not required to involve the SBA or lender in the sale of your business if you have received a PPP loan. If the loan is fully satisfied before closing the sale of your business, there are no restrictions or notification requirements. If you are selling less than 20% of your ownership interest or stock in the company, it is not considered an ownership change and you do not have notify the SBA. Similarly, if you are selling less than 50% of the company’s fair market value of its assets you do not have to let the them or lender know of the sale.
In any other situation, you will at least need to notify the PPP lender in writing about the sale and provide them with a copy of the proposed purchase agreements. This applies if you are selling more than 20% and less than 50% of your ownership interest. If the type of sale is an asset sale, where no more than 50% of your business’s assets are sold, no additional approval is needed. Mergers also require written notice to the SBA, but not their permission.
Business Sales that Require Additional Steps
If you are selling more than 50% of your ownership interest or stock in the company or more than 50% of the fair market value of your business’s assets, you will need to take the following steps before selling your business. This can get complicated, so it would be in your best interest to work with an experienced business broker who knows how to navigate these specific scenarios.
- Complete and loan forgiveness application and submit it to the PPP loan lender
- Set up an interest-bearing escrow account with the PPP lender with the outstanding loan amount before closing
- After the PPP loan forgiveness process, disburse the escrow fund to repay the PPP loan balance, plus interest
- The lender will need to send notification about the escrow account to the SBA within 5 days of closing
If the above conditions regarding the escrow fund cannot be met, and the PPP has not been paid in full, the SBA will require pre-approval. Their approval will then depend on the condition of the buyer assuming all of the PPP loan obligations. A separate loan agreement or an inclusion of the PPP loan obligation in the purchase agreement is required and will be reviewed by the SBA. They will then have 60 days to review it and respond.
Special Considerations for Businesses With Economic Injury Disaster Loans
Unlike PPP loans, the EIDL program has been around for decades. These loans are funded and administered by the SBA without the involvement of a private lender. They can also have very long loan terms, of up to 30 years, which means they are much more likely than a PPP loan to factor into a sales transaction.
All borrowers of EIDL loans are required to obtain the SBA’s approval of the sale of their business. This obligation includes asset sales for EIDLs over $25,000, since they require collateral. All EIDLs must be repaid at the time of the business sale, but they can be paid from the proceeds of the sale. Some sellers received both a PPP loan and an EIDL grant. In this case, if the PPP loan is forgiven, the grant is exempt from the loan forgiveness, and the seller is given a PPP loan payment plan to pay back the amount of the grant.
Even without the complication of disaster relief loans, selling a business can be very daunting. The process is like a roller coaster, with many up, downs and sudden sharp turns. Dealing with SBA loan repayment adds another hurdle. While you can sell your business with outstanding PPP and EIDL loans, you must take special care not to make any mistakes that could spoil a potential deal, or cost you a lot of money down the road. The best way to do this is to hire a professional mergers & acquisitions advisor, such as a business broker.
If you own a business in the Fort Myers, Sarasota, Naples or Tampa Bay areas, and are interested in selling it, contact Corporate Investment Business Brokers (CIBB) for a consultation. We know how to navigate the sale when disaster relief loans such as EIDL and PPP are involved. For 35 years, we have been helping all types of small businesses sell their companies, regardless of their circumstances.
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