Q: Like many travel agency owners, I obtained a Paycheck Protection Program (PPP) loan a couple of months ago. I haven't wanted to spend it all at once, so I am stretching it out to cover payroll over the maximum 24 weeks allowed. After that, I will apply for forgiveness of the loan and, based on what I have read, will probably get most if not all of it forgiven. Meanwhile, I want to sell my agency and retire. Can I legally sell it while the PPP loan is outstanding? If I have to wait until it is forgiven before selling my agency, I could go out of business in the meantime.
A: The Cares Act, which is the law that set up the PPP loan program, does not prohibit you from selling your business while the loan is outstanding. However, the loan agreement or promissory note that you signed with your bank probably prohibits such a sale.
A typical clause in the documents states, "The borrower will not, without lender's prior written consent: (i) change the ownership or business structure during the terms of the loan; or (ii) sell, lease, pledge, encumber, or otherwise dispose of any of borrower's property or assets except in the ordinary course of business."
So, you need your bank's consent to sell the assets of your agency or your ownership interest (stock or limited liability company membership) in the company. The bank has discretion to consent to the sale, and it may consent if you will have the money to repay the loan in case it is not forgiven or if a qualified buyer takes it over.
If you close on the acquisition before getting the bank's consent, you may be defaulting under the PPP loan terms, triggering remedies for the lender, including default interest and immediate repayment, making it difficult or impossible to apply for any forgiveness.
However, even if the bank consents, it does not necessarily follow that you will still be eligible for forgiveness. Unfortunately, the Small Business Administration (SBA) has not issued any guidance on this subject, and I see a few stumbling blocks that an acquisition could throw into the path of forgiveness.
For example, if you sell your assets and the buyer takes over your payroll during the 24-week period, your forgiveness application may not be approved because you did not restore any of your pre-Covid head count at the end of the 24-week period. If you sell your stock to a buyer that had over 500 employees, you wouldn't have been eligible for a loan, so you may not be eligible for forgiveness.
So, depending on your loan documents, the bank's willingness to consent and the structure of the acquisition, you may want to wait until the loan is forgiven before closing on the sale. You can apply for forgiveness now, but the bank has up to 60 days to decide to approve your forgiveness application, and if the SBA needs to approve the forgiveness, it has another 90 days.