Perhaps you’ve asked, “Can I sell my business if I got a PPP loan?”
The long and short is yes, it’s possible, however, there’s a series of considerations from the Small Business Administration (SBA), the holder of your PPP loan debt that you need to comply with.
In this post, we explore what those terms are and how you can satisfy each one to sell your company.
The Payment Protection Program Loan
At the onset of the coronavirus crisis, the SBA launched its Payment Protection Program Loan in 2020. This relief program was developed to assist business owners.
As can be imagined, selling a business encumbered by a government loan requires you to tread cautiously.
So, the first thing you should do before approaching investors to sell your business is to apply for the Small Business Administration PPP Loan Forgiveness scheme. You want to be free of this debt as soon as possible.
But what exactly does the SBA consider as a change of business ownership? When:
- At least 20% of the common stock or the ownership interest is sold or transferred;
- At least 50% of the assets are transferred or sold;
- Your company is merged with another business.
For the sale to go through and ownership to change, you’ll need SBA approval. Thankfully, there’s official SBA procedural guidance to help navigate business sales involving PPP loans.
The Process of Selling a Business With a PPP Loan
As the PPP borrower, you’re obliged to inform the PPP lender of the planned merger or acquisition in writing. This must be done before the closing or change of ownership is enacted.
To get a sign-off from the PPP lender, you’ll need to furnish the PPP lender with copies proving that:
- You’ve completely satisfied and completed the loan forgiveness process.
- The PPP lender has received their funds as stated in the PPP Note from the SBA.
- You’ve fully paid off any outstanding balance on the PPP loan.
There are four possible pathways you can follow when selling your company:
Pathway #1 Get PPP Loan Forgiveness
The PPP debt you have must be fully forgiven before you’ll be given approval by the SBA to sell the business or change ownership. Alternatively, you can pay an agreed-upon sum – a maximum payable amount – to complete the closing.
Pathway #2 A 50% or Less Stock Sale
If your intended transaction is a stock sale in which you’re selling a maximum of 50% or less of the company, there’s no requirement to notify the SBA. The transaction can go on without interruption.
Pathway #3 A 50% or more Stock/Asset Sale
If you’re intending on selling more than 50% in stock or assets and your PPP loan is unforgiven, you’re required to first obtain loan forgiveness.
To receive forgiveness, the aggregate loan sum including interest must be placed in escrow until the loan forgiveness application has been completed.
Whatever has been forgiven can be remitted to you and what wasn’t forgiven will be deducted from the escrow account. This escrow fund is controlled by the SBA lender and they’ll have direct access to the money during the processing of your loan forgiveness.
Pathway #4 SBA Lender Intervention
What happens in the case where you don’t have enough funds to place into an escrow account? In this case, you must engage with the SBA for ownership transfer approval.
A letter explaining your situation regarding why you cannot escrow the funds needed to fulfill the PPP loan must be sent to the SBA lender who will forward it to their SBA Loan Servicing Center.
You’ll be asked to provide them with copies of
- The PPP Loan
- The PPP Note
- The Sale Agreement
NB: You must also disclose the following:
- Whether or not the potential buyer is also on a government relief program or has a PPP loan and,
- The names of stakeholders with a 20% stake in the entity purchasing your business.
Engage a Business Broker to Ease the Selling Process
Getting a business ready to present to investors requires the assistance of experienced brokers who will help you gather and prepare financial documents, conduct business valuation, and screen and qualify buyers.
If you’re thinking of selling your business, contact us at Sun Acquisitions. Let’s help you get the best returns on your investment.
Looking for more insight on selling a business? Check out these links:
- Best Practices For A Successful First Meeting With A Business Owner
- Are You Financially Ready?
- Are You Emotionally Ready?
- Waiting Too Long to Sell
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.