Handling PPP Loans in an Automotive Buy-Sell Transaction

By Gregory May 

Many dealers were hit hard at the onset of the Covid-19 pandemic, and subsequently availed themselves of the benefits afforded by the federal Paycheck Protection Program. However, months have passed, and for various reasons, these same owners now find themselves in a position where they are selling their interest in the dealership. The question arises as to how the PPP loans should be handled at closing, and in the contractual phases of a buy-sell.  

The parties obviously want to avoid running afoul of the SBA guidelines, and savvy buyers want to avoid assuming any unnecessary liabilities, but how are these loans addressed? 

Thankfully, the SBA provides recommended procedures for handling various types of buy-sells, distinguishing between asset transactions and stock sales, as specifically set forth in SBA Procedural Notice Control No 5000-20057. 

The SBA procedures apply to all “changes of ownership”, which are considered to have occurred when (1) at least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred (including to an affiliate), (2) the PPP borrower sells or transfers at least 50% of its assets (based on fair market value), or (3) a PPP borrower is merged with or into another entity. 

Obviously, there are no restrictions if the loan has been repaid or forgiven; however, if a balance remains, then one must analyze the transaction further and take additional steps to ensure that the guidelines are followed.  Essentially, if there is a sale or transfer of 50% or more of the stock or assets of the company, then the PPP borrower must submit a PPP loan forgiveness application together with supporting documents to the PPP lender, and establish an interest-bearing escrow account equal to the outstanding balance of the loan. Once the loan is forgiven, the escrow can be released, and we find that properly completed applications are normally handled within a few weeks.  

If the forgoing procedure is not followed, then SBA approval is required. The timing of this process is uncertain, and approval would require the buyer to assume the PPP borrower’s obligations; thus we have found that most every dealer will complete the above-referenced escrow procedure to avoid any delays and uncertainty in the transaction.    

Please seek guidance from your tax professionals prior to completing the process, and feel free to reach out with your buy-sell questions.