Mark Pestronk
Q: In your Sept. 21 Legal Briefs column, "A PPP loan complicates agency sale," you noted that the typical promissory note that Paycheck Protection Program (PPP) loan recipients sign states that a change of ownership is an "event of default," unless the bank consents to the change. However, I have just heard that the Small Business Administration (SBA) has issued guidance allowing changes of ownership to proceed. Is that correct, and if so, what do we need to do in order to complete the sale of our agency?
A: It is true that in early October the SBA issued what amounts to a regulation that sets out a clear but narrow path allowing acquisitions to proceed immediately without any prior approval. The trouble is that the path is so narrow that most agencies will be unable to tread it.
For an asset sale, which is the most typical type of acquisition transaction, the selling travel agency has to do two things: First, it must complete and submit to its bank a forgiveness application on the form prescribed by the bank, which is usually the SBA's full or EZ form, both of which can be found here.
The trouble with this first step is that many banks are not yet accepting forgiveness applications for a variety of reasons, including their hope or expectation that new legislation will provide for automatic forgiveness of PPP loans under $150,000.
The second step is much harder to comply with: The borrower must set up "an interest-bearing escrow account controlled by the PPP Lender ... with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA's decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest."
In other words, the seller must set up an escrow account and deposit funds equal to the PPP loan. These two steps -- completed forgiveness application and escrow deposit -- must be done before the closing on the acquisition. If they are done, then SBA approval of the acquisition is not needed, and by implication, the bank's approval would not be needed, either.
The trouble with the escrow step is that most travel agencies do not have enough cash on hand to fund the escrow, and buyer's down payments are usually very small or nonexistent. Even if the buyer could fund the escrow, it may be reluctant to do so before closing on the acquisition.
The SBA's decision also covers what must happen if the borrower does not set up the escrow. In that case, the bank needs to submit the following to the SBA for prior approval of the acquisition: (1) the reason that the PPP borrower cannot fund the escrow; (2) the details of the requested transaction; (3) any letter of intent and the purchase or sale agreement; (4) disclosure of whether the buyer has an existing PPP loan; and (5) a list of all owners of 20% or more of the buyer.
The SBA then has 60 days to approve or disapprove the acquisition.