There are multiple small business loans, but one that became particularly business-saving in 2020 during the COVID-19 pandemic was the Paycheck Protection Program (PPP) loan. Backed by the Small Business Administration (SBA), there were nearly 60,000 PPP loan applications submitted as of the beginning of 2021. In fact, San Diego businesses alone were granted up to $6.1 billion in PPP loans. As you can imagine, it is not uncommon to wonder how a PPP loan is affected by a business sale.
Change of Ownership
In the event of a “change of ownership,” you may need to notify your lender that you are considering a sale. However, there are three instances when that is unnecessary.
- The PPP loan has been fully repaid before the closing or sale or your business has completed the loan forgiveness process
- The sale or transfer of the business is less than 20% of ownership stock or interest
- The sale or transfer of the business is less than 50% of the business's fair market value of its assets in one or more transactions
That said, a proper change of ownership will require written lender notification before the closing of any transaction. In this instance, there are several steps to be taken.
- Complete and submit the PPP loan forgiveness application
- Establish an interest-bearing escrow account for the remaining balance on the PPP loan
- At the end of the loan forgiveness process, disburse the escrow fund to repay any remaining PPP balance plus (applicable) interest
- The lender will need to notify the SBA loan servicing center about the escrow amount and its location at least five business days before closing
The SBA Approval Process
In some cases, the SBA may need to approve before there is a sale. As mentioned previously, if more than 50% of the ownership stock or fair market value of the assets are sold, the SBA requires pre-approval. This step is handled by the PPP lender and time should be allowed for this process. Once approved, which can take up to 60 days, you can sell the business.
With the guidance of a business broker, there is little to nothing that can go wrong if you are selling your northern San Diego business with a PPP loan. The fact of the matter is, anything is possible if you understand the processes and know when to consult an experienced business broker about what would work best for you and your business. Your advisor is your greatest advocate.