[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
NAVIGATING REGULATIONS: ALTERNATIVE PATHWAYS TO INVESTING IN SMALL
BUSINESSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT, INVESTIGATIONS, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 12, 2024
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 118-044
Available via the GPO Website: www.govinfo.gov
_______
U.S. GOVERNMENT PUBLISHING OFFICE
54-984 WASHINGTON : 2024
HOUSE COMMITTEE ON SMALL BUSINESS
ROGER WILLIAMS, Texas, Chairman
BLAINE LUETKEMEYER, Missouri
PETE STAUBER, Minnesota
DAN MEUSER, Pennsylvania
BETH VAN DUYNE, Texas
MARIA SALAZAR, Florida
TRACEY MANN, Kansas
JAKE ELLZEY, Texas
MARC MOLINARO, New York
MARK ALFORD, Missouri
ELI CRANE, Arizona
AARON BEAN, Florida
WESLEY HUNT, Texas
NICK LALOTA, New York
CELESTE MALOY, Utah
NYDIA VELAZQUEZ, New York, Ranking Member
JARED GOLDEN, Maine
KWEISI MFUME, Maryland
DEAN PHILLIPS, Minnesota
GREG LANDSMAN, Ohio
MARIE GLUESENKAMP PEREZ, Washington
SHRI THANEDAR, Michigan
MORGAN MCGARVEY, Kentucky
HILLARY SCHOLTEN, Michigan
JUDY CHU, California
SHARICE DAVIDS, Kansas
CHRIS PAPPAS, New Hampshire
Ben Johnson, Majority Staff Director
Melissa Jung, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Beth Van Duyne.............................................. 1
WITNESSES
Mr. Parag Shah, Co-Founder & Chief Technical Officer, Vemos,
Washington, DC................................................. 3
Ms. Mary Kennedy Thomposon, Chief Operating Officer, Neighborly,
Waco, Texas.................................................... 5
Mr. Jeremy Kress, Assistant Professor of Business Law, University
of Michigan, Stephen M. Ross School of Business, Ann Arbor, MI. 7
APPENDIX
Prepared Statements:
Mr. Parag Shah, Co-Founder & Chief Technical Officer, Vemos,
Washington, DC............................................. 19
Ms. Mary Kennedy Thompson, Chief Operating Officer,
Neighborly, Waco, Texas.................................... 25
Mr. Jeremy Kress, Assistant Professor of Business Law,
University of Michigan, Stephen M. Ross School of Business,
Ann Arbor, MI.............................................. 33
Questions and Answers for the Record:
Questions from Hon. Velazquez to Mr. Jeremy Kress and Answers
from Mr. Jeremy Kress...................................... 42
Additional Material for the Record:
Engine Letter................................................ 45
NAVIGATING REGULATIONS: ALTERNATIVE PATHWAYS TO INVESTING IN SMALL
BUSINESSES
----------
TUESDAY, MARCH 12, 2024
House of Representatives,
Committee on Small Business,
Subcommittee on Oversight,
Investigations, and Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2360, Rayburn House Office Building, Hon. Beth Van Duyne
[chairwoman of the Subcommittee] presiding.
Present: Representatives Van Duyne, Alford, Crane, Bean,
and Gluesenkamp Perez.
Chairwoman VAN DUYNE. I will now call the Subcommittee on
Oversight, Investigations, and Regulations to order. Without
objection, the Chair is authorized to declare a recess of the
Committee at any time.
I now recognize myself for my opening statement.
I want to welcome all of you here today. This hearing will
highlight how small businesses across the nation are struggling
to access capital because this administration continues to
impose undue restrictions. Access to private credit is more
critical today than it has ever been, and I want to thank our
witnesses for joining us to have a robust conversation on this
topic. I am eager to hear from you and to discuss how we can
empower our job creators to access the investment sources they
need to grow.
Small businesses across America are continuing to navigate
economic challenges in a post-pandemic world, alongside the
repercussions of reckless government spending that has given us
decades high inflation and crushing interest rates. Coupled
with stifling regulations implemented by this administration,
it is now more expensive and strenuous to do business than ever
before. Our job creators rely on access to capital to keep
their doors open, and without stable access to capital, our
small businesses don't have the certainty that they need to
grow, or in some cases, just to survive. Along with limited
access to small business investment options, bank lending
standards have grown stricter and loan growth has slowed
significantly, making it much harder for mom and pops shops to
stay afloat.
Instead of lenders being able to make decisions based on
business models and risk assessment, this administration is
forcing them to base investment decisions on demographic
quotas. Entrepreneurs, job creators, and employees at small
businesses are much more than demographic boxes to check. Small
businesses are critical to communities across our country and
are the result of innovation and hard work. And as I have heard
from a constituent who is a community banker, capital is
sitting there unused and her hands are tied. Our small
businesses are getting left behind because this administration
continues to impose new regulations and direct investment where
they think is best, rather than allowing meritocracy to
prevail.
Over the next decade, compliance with President Biden's
regulations will cost Americans more than $1.5 trillion. Since
the day President Biden took office, he has burdened our job
creators with more than 287 million hours in additional
paperwork. As regulatory complexity grows, so do costs to do
small business that are already burdened by this
administration. As we've heard time and time again, over
regulation can shutter the doors of any small business. These
regulations make it difficult or even impossible for businesses
to comply, to compete and survive, let alone make a profit.
Private credit, which comes from nontraditional investors,
has long been a lifeline for entrepreneurs across the country.
But it is especially important now given this administration's
agenda. As the federal government attempts to regulate our
small businesses out of existence, private investment is
stepping up to fill the void. More than 80 percent of
investments made by private equity support small businesses. In
my district, more than 130,000 jobs are supported by private
equity. The bottom line is private financing has grown because
it is needed, useful, and is successful at helping American
businesses in every sector, from healthcare and biosciences to
energy production and consumer services.
I am grateful to our small businesses and I am grateful
that they have this option. I am also glad to be able to hold
this hearing today to put the needs of our job creators first
and push back on the Biden Administration's destructive
regulatory environment.
We are going to go ahead and move forward to introducing
our witnesses that are here today. I want to thank each and
every one of you. Our first witness is Mr. Parag Shah. Mr. Shah
is the Co-Founder and CTO for Vemos, which is located in
Minneapolis, Minnesota. Vemos is a mobile payments and
analytics company that serves the hospitality industry by
creating personalized digital experiences. Prior to founding
Vemos, Mr. Shah founded Fidelity LLC, bringing technology ideas
to the market, working with him and working with creating other
technology companies. While still in college, he found MX app
building a product called Lunchbox, allowing customers to order
from restaurants using their phones. He was named a finalist in
the 2009 Global Student Entrepreneur Awards. Mr. Shah graduated
from the University of Minnesota's Carlson School of
Management, where he earned his degree in entrepreneurial
management. Thank you for joining us today and we look forward
to the conversation ahead.
Our next witness here today is Ms. Mary Kennedy Thompson.
Ms. Thompson is the Chief Operating Officer for Neighborly, a
holding company of 29 brands focused on home services located
in Waco, Texas. At Neighborly, Ms. Thompson oversees all
business operations within the company and works with 17 brand
presidents, leading the execution of strategies and
initiatives. Prior to being appointed COO, she served as
Executive Vice President of Neighborly and President of Mr.
Rooter. Prior to her experience franchising, Ms. Thompson
served 8 years in the U.S. Marine Corps as a logistics officer.
She is the recipient of the International Franchise
Association's Bonnie Levine Award. The highest award for women
who have made an impact on franchising. Ms. Thompson graduated
from the University of Texas at Austin with a Bachelor of Arts
in English. She then went on to complete the Mini MBA Program
in franchise management from the University of St. Thomas
College of Business. Thank you for your service and thank you
for being with us today.
Our final witness is Professor Jeremy Kress. Professor
Kress is an Assistant Professor of Business Law, at the
University of Michigan's Stephen M. Ross School of Business.
Before entering academia, Professor Kress was an attorney in
the banking regulation and policy group at the Federal Reserve
Board of Governors here in Washington. He served as counsel to
the Assistant Attorney General for Antitrust at the U.S.
Department of Justice, focusing on bank merger policy.
Professor Kress is an expert on banking policy and capital
formation issues and has previously testified before Congress
on these matters. Professor Kress graduated cum laude from
Harvard Law School and from the Harvard Kennedy School, where
he was a presidential scholar. He holds a BBA from Michigan
Ross. Professor Kress, thank you again for being here today.
Before recognizing the witnesses, I would like to remind
them that their oral testimony is restricted to 5 minutes in
length, and if you see the lights turn red in front of you, it
means your 5 minutes have concluded, and you might hear a
little bit of a gavel. But you should wrap up your testimony.
So I now recognize Mr. Shah for his 5 minutes opening remarks.
STATEMENTS OF MR. PARAG SHAH, CO-FOUNDER & CHIEF TECHNICAL
OFFICER, VEMOS; MS. MARY KENNEDY THOMPSON, CHIEF OPERATING
OFFICER, NEIGHBORLY, AND MR. JEREMY KRESS, ASSISTANT PROFESSOR
OF BUSINESS LAW, UNIVERSITY OF MICHIGAN, STEPHEN M. ROSS SCHOOL
OF BUSINESS
STATEMENT OF PARAG SHAH, CO-FOUNDER & CTO, VEMOS
Mr. SHAH. Thank you. Chairwoman Van Duyne, and Members of
the Subcommittee, thank you for inviting me to testify today
regarding the experience of alternative financing for small
businesses. My name is Parag Shah and I am the Co-Founder of
Vemos, a Minnesota based company that creates personalized
experiences between hospitality businesses and their guests.
Using our app, consumers can view a personalized menu tailored
to their allergies and dietary needs, quickly view and pay
their bill, and get rewarded from their favorite spots. Simply
put, our software helps restaurants better understand their
customers and provide more personalized guest experiences,
which in turn allows them to grow their business.
I have spent my entire career dedicated to starting and
scaling businesses. Prior to Vemos, I have been the founder of
several technology companies, many of which have failed, but a
few have succeeded. I am also a mentor for rising tech
entrepreneurs and I am a proud member of ACT, the App
Association, a trade group for representing small tech
companies like mine.
When most people hear the words entrepreneur or tech
startup, they think of successful unicorns featured in the
media. But the reality is, building a company is extremely
difficult and the outcomes are not guaranteed, no matter the
background, the effort of the team, or funding received. And
for those of us that are crazy enough to choose this, it is
vital for there to be an opportunity to succeed, not just for
the founders, but for every single person involved in the
journey.
While there are many types of small businesses, my
entrepreneurial story has centered around technology and
software, where some level of funding is typically necessary to
grow. The funding can come in many forms and isn't limited to
venture capital. Although we have raised venture capital, I
have more experience with widely used investment rounds such as
friends and family, angel, and seed. The reality is most
entrepreneurs don't have connections to investors and capital,
while businesses like ours struggle with traditional options
like bank loans, even ones backed by the SBA, because we don't
have traditional assets. Therefore, outside private capital is
very important to us.
One of the best parts about being in software is how
quickly you can build and test an idea with limited upfront
capital. It is scaling the business that comes with the funding
hurdles. In 2007, when I started my first company while
attending the University of Minnesota, this is exactly what
happened. A few of us came up with an idea, started writing
code, and tested our product with real customers. It turned out
that we had a winning product on our hands. That is when the
real work started, and that is when the funding was necessary.
At the time, there weren't as many resources for founders as
there are today. Plus, much of the capital was concentrated on
coasts. Even after gaining traction, we struggled to raise
capital locally, and as first-time founders and students, we
had no capital ourselves and a resume that did not help
investors. We were fortunate to close a small round of angel
investors to grow our business, but at the time we were not
educated to find additional capital elsewhere. After a lot of
struggle and sweat equity, we were able to exit, but far less
than what I believe we should have achieved if we were given
the right resources.
Today, early stage tech entrepreneurs are fortunate to have
more funding resources at their disposal. Another funding
option that has gained recent popularity is crowdfunding, which
can be a means of distributing equity or essentially a donation
with a promise to provide a product or service later. For us,
dealing with a large number of shareholders, as well as the
time and cost to raise this round, was far too high to be worth
it, and this is generally why we've raised capital from
accredited investors. However, I want to see more options for
access to capital rather than fewer. In that vein, it might be
worth seeing if the accredited shareholder threshold could be
reworked to be more flexible depending on the cost of living.
I understand that some regulation is important to make sure
investors and entrepreneurs are held accountable. However,
overregulation leads to stagnation, decreases in new company
formations, and limits deployment of new capital. We have seen
that play out over the past few years as regulations have made
it harder for businesses to exit. For a company like ours,
being able to exit is fundamental to our business plan and
affects everything from raising capital to hiring great people.
An exit, whether it be a merger, acquisition, or IPO, allows
employees to be rewarded for their hard work, investors to be
compensated for taking a risk, and founders to capture the
capital they need to build the next great company. But most
importantly, it is one of the keys to sustainable economic
growth.
Early stage investment is critical for building a highly
competitive economy. Entrepreneurs already face long odds and
we need to avoid adding unnecessary costs and overburdensome
government rules. You are in a key position to make sure
America continues to be a place for new ideas and innovation.
Ensuring the path is clear for entrepreneurs to access
alternative financing options is an effort I am honored to be a
part of. Thank you for this opportunity and I look forward to
your questions.
Chairwoman VAN DUYNE. Thank you very much. I now recognize
Ms. Kennedy Thompson for her 5 minute opening remarks.
STATEMENT OF MARY KENNEDY THOMPSON, COO, NEIGHBORLY
Ms. KENNEDY THOMPSON. Good morning, Chairwoman Van Duyne,
and distinguished Members of the Committee. My name is Mary
Kennedy Thompson and I am the Chief Operating Officer of
Neighborly, a family of home services companies with more than
5,800 franchises serving 12 million customers across six
countries. We specialize in repairing, maintaining, and
enhancing people's homes and properties worldwide. It is my
honor to be here today to give you my perspective on the impact
alternative areas of financing can have on small businesses,
especially franchisees, franchisors, and their employees.
I appear before you today on behalf of the International
Franchise Association, or IFA. IFA members include franchise
companies in more than 300 different industries and individual
franchisees that support nearly 8.7 million direct jobs. Today,
I will tell you more about Neighborly and franchising in
general. I will also share how some of the ways non traditional
financing, such as through private equity, helps grow brands
and companies faster and smarter. I believe franchising is the
greatest democratization of wealth creation that exists today.
I have spent more than three decades in franchising, both
as a franchisee and a franchisor. Before my career in
franchising began, I served 8 years in the Marine Corps as a
United States Marine Corps Officer, including being the first
female Platoon Commander for my unit. When I returned home to
Texas after serving time in the Marine Corps, I wanted to own
my own business. I wanted to take control of my own destiny and
serve my community. But I had no business experience and I knew
I needed help if I was going to make my dream come true. In
1994, I got my start as a franchisee in the Cookies by Design
system and I have grown in franchising ever since. The
franchise model empowered me, someone with no business
experience, to start my own business with the guidance,
resources, and assistance I needed to be successful. With that
success, I was able to create hundreds of jobs in my community.
With my role in Neighborly, I now help new franchisees
under all 30 of our brands achieve their business dreams of
owning their own destiny, just as I did 30 years ago. Our
mission at Neighborly is to teach our principles and systems of
personal and business success so that all people we touch live
happier, more successful lives. We do that by teaching the
franchise system, including how to run a business well, how to
take care of customers, serve the community, and create jobs.
Now, we don't employ, hire, or fire our franchisees employees.
It is not the role of the franchisor to get between a
franchisee and their employees. Rather, our role is to share
with franchisees our knowledge and experience to ensure that
they are doing it the best possible way and that they are
growing their businesses.
I have lived the American dream of being an entrepreneur
and helping grow and scale businesses, but it would not be
possible without alternative forms of capital. Private equity,
for me, has been a catalyst for growth and for many of our
franchisees and Neighborly. In the past years, small business
owners like me, when I was wanting to franchise, we could
depend on our local bankers and community banks to be a willing
partner, providing capital at reasonable interest rates and an
ally throughout the many steps of growing a business.
But in the era of consolidation and mega mergers, this
breed of bankers faded away, and they are less concerned with
growing their local neighborhood Glass Doctor, for example.
Many of our franchise owners don't speak the language of high
finance. They are small business owners. Many without college
degrees. There is a divide in the business world between the
elite and these small business owners who are important part of
their communities. They may not know where to go to get
financing, to grow their businesses, or to secure favorable
rates.
This is where private equity has become an asset to our
franchise owners. Private equity brings their experience across
various sectors to help franchise owners make informed
decisions and stay ahead of the curve. Most importantly,
private equity can serve as an effective liaison to the banks,
to financing, and to other investors. They give our franchise
owners instant credibility and connections. Private equity
shops can serve as translators for our owners, connecting those
with capital to those who need it. The benefits of private
equity networks also extend well beyond financial backing. They
open doors for our franchise owners and help them connect to
potential clients, suppliers, and other businesses within the
portfolio. These relationships can supercharge in terms of new
partnerships, joint ventures, and new market opportunities.
They are effective thought partners helping grow these small
businesses.
Now, private equity nor additional working capital isn't
the silver bullet. I tell all my franchise owners they need a
strong foundation and a vision for the future to maximize what
private equity can do in their business. When a franchise owner
gets the right thought partner, private equity can be the
rocket fuel that takes their business into the stratosphere.
And with that growth comes increased jobs in their communities.
Madam Chair, thank you again for the invitation to speak on
behalf of small business owners everywhere. I look forward to
answering any questions you may have.
Chairwoman VAN DUYNE. Thank you very much. I now recognize
Mr. Kress for his 5 minute opening remarks.
STATEMENT OF JEREMY KRESS, ASSISTANT PROFESSOR OF BUSINESS LAW,
UNIVERSITY OF MICHIGAN, STEPHEN M. ROSS SCHOOL OF BUSINESS
Mr. KRESS. Chairwoman Van Duyne, Members of the
Subcommittee, thank you for inviting me to testify at today's
hearing. By way of background, I am an Assistant Professor of
Business Law at the University of Michigan, Stephen M. Ross
School of Business. My research focuses on bank regulation.
Prior to entering academia, I was an attorney at the Federal
Reserve Board, where, among other things, I worked on
implementing the Dodd-Frank Act and the initial Basel III
capital rule.
Small businesses are the lifeblood of the American economy.
Indeed, small businesses create more than two thirds of new
jobs in the United States and account for almost half of U.S.
GDP. On a personal note, one of the things I love most about my
hometown of Ann Arbor is the thriving community of small
businesses like Zingerman's Deli and Argus Farm Stop that give
the city its unique college town feel. In light of the
essential role small businesses play in local communities and
the national economy, it is critical that policymakers ensure
that entrepreneurs have access to funding to establish and grow
their businesses.
I will make four points in my testimony today. First,
policy responses to the 2008 financial crisis have helped
promote small business credit availability by enhancing the
resilience of the banking system. Since Dodd-Frank and Basel
III were enacted, small business lending has grown at a robust
pace. Indeed, the implementation of these new safeguards
coincided with the longest U.S. economic expansion on record.
This experience confirms that strong bank capital requirements
are consistent with long term credit creation, economic
expansion, and small business growth.
Second, the Basel III Endgame capital rule, proposed last
year by the Federal Banking Agencies, will further bolster the
banking system and will not impair small businesses access to
credit. There are two specific reasons why Basel III Endgame
will not harm small businesses. First, the proposal applies to
only the 37 largest U.S. banks with more than $100 billion in
assets. These banks focus far less on small business lending
than local community banks, which tend to specialize in small
business lending and which are unaffected by the Endgame
proposal. Second, most of the capital increase in the Basel III
Endgame proposal is associated with large banks' trading and
fee generating business lines, not their lending activities.
The rule could, in fact, encourage large banks to put
relatively greater emphasis on small business lending as they
reorient toward less capital intensive activities.
Third, when small businesses have trouble obtaining bank
financing, bank consolidation and lax merger oversight often
are to blame. The U.S. banking system has experienced dramatic
consolidation over time. Regrettably, small businesses suffer
when banks consolidate. Since larger banks tend to favor larger
borrowers, bank mergers create barriers to entry for new
entrepreneurs. Numerous empirical studies have documented a
reduction in small business lending associated with bank
mergers. For small businesses that are able to obtain loans
following a bank merger, credit becomes more expensive, average
loan size declines, and non-price loan terms, such as
collateral requirements, become more onerous. Despite the
harmful effect bank mergers have on small businesses,
policymakers have to date done little to stem the tide of bank
consolidation.
Fourth, alternative sources of small business financing,
such as private equity, private credit, and venture capital may
benefit certain small businesses, but they also pose potential
risks and must be overseen accordingly. When structured with
appropriate guardrails, private capital can create new pathways
for small businesses to grow. However, policymakers and small
business owners should approach private capital with caution.
Based on the minimal data available, private investors
appear to focus on the same types of businesses that already
have access to capital. Thus, private markets may be ill suited
to reduce barriers to financing for underserved small
businesses, including minority- and women-owned companies. In
addition, the interests of private investors are not
necessarily aligned with those of a small business's owners,
its employees, or its community. Since private investors
typically have a limited time horizon, they may pursue short
term profits by liquidating a business's assets, reducing long
term capital investments, loading up the company with debt, or
paying out profligate dividends. While these strategies may be
detrimental to a small business's long term prospects, they are
often profitable for the private fund that intends to exit its
investment after just a few years.
In closing, I am grateful for the opportunity to discuss
these important issues with you today. Thank you, and I look
forward to your questions.
Chairwoman VAN DUYNE. Thank you very much. We will now move
to the Member questions under the 5 minute rule, and I will now
recognize myself for 5 minutes.
Mr. Shah in the private equity space, merger and
acquisition transactions are a vital tool to help businesses
expand into new geographic markets. They also help fuel
innovation and lower prices. While most mergers do not require
additional information once a premerger notice is filed with
the FTC and DOJ, a small percentage are subject to additional
review out of fear of possible antitrust harm. In your
testimony, you mentioned that you are concerned with one of the
newer FTC proposals that would subject every premerger notice
to additional review, which would force small businesses to
spend a lot more time and money on providing likely unnecessary
documentation. So do you believe that this will affect one's
ability to find alternative financing, and if so, how and why?
Mr. SHAH. Thank you for that question. Yes, I do. I believe
that because when you are starting a business, specifically
small businesses that are in technology and software that are
very high fast growth companies, and it is required to go after
private financing, such as, like I said, angel investing,
venture capital, it is important that we have an exit strategy.
And if that exit strategy by any means is compromised or could
be compromised even the eyes of an individual, a fund, society
in general, then it definitely impacts us for the ability to
raise that capital.
Any additional regulation--we don't know as entrepreneurs
when this exit is going to happen. We can't predict that. I
wish I could. And we don't know where it is going to come from.
And if we have the opportunity for an exit that meets the
requirements of all of our shareholders as well as our
employees, and it is then come to where additional paperwork is
required. And from that additional paperwork, it may even mean
that we are not allowed to merge or allow to be acquired due to
antitrust laws. It can have a ripple effect in our business
plan and the ability for us to continue to raise additional
capital to run our business.
Chairwoman VAN DUYNE. What I have heard over and over again
is that businesses are happy to play by the rules, but they
need to know what they are.
Mr. SHAH. Absolutely.
Chairwoman VAN DUYNE. When they are continuously changing,
it is very difficult to have an exit strategy or build a
business model around that. Can you kind of expand a little bit
on what you are seeing in that industry, in that area?
Mr. SHAH. Yes. I think a lot of people might think we're a
lot smarter than we are and the reality is we're not. We find a
problem in the world, we go out and solve it, and sometimes
that solution works and sometimes it doesn't. But when that
solution works, we need the ability to go after it with all of
our might and power to see if it is successful. And because of
that, we don't know where that financing is going to come from.
We know how to grow the business. We know the right talent
to bring on a lot of times, but we don't know how to get that
exit. And that exit is critical, again, to the way that we
raise capital. A lot of the private markets require us to have
an exit because that is how that capital goes back into the
economy and grows more small business owners. And I include
employees in this, and I think a lot of people forget employees
because, especially in the tech sector, employees have stock
options and they are tied to the business. And when the
business exits, they are able to also get a substantial reward
and help new small businesses.
Chairwoman VAN DUYNE. Thank you. Ms. Kennedy Thompson, in
April last year, the SBA under the Biden Administration made a
number of rule changes to some of its biggest lending programs,
including the 7(a) and 504, which franchises heavily utilize.
Among those changes was the elimination of the franchise
directory in an effort to simplify affiliation determinations.
Can you speak to how the SBA's rules change to eliminate the
franchise directory has or could impact access to capital for
franchisers?
Ms. KENNEDY THOMPSON. Yes. Well, anytime--you talked about
this earlier, anytime there is change, and it creates
uncertainty. And the first thing it does is it makes the
business owners decide maybe not to grow anymore where they
are. They think, you know what? There is so much work, I have
taken so much work to get to here, to get to the next place. I
am not sure I understand it, and I am not sure I am willing to
take that risk. And so, change puts this uncertainty in the
business owner, especially the small business owner's mind,
that causes them to not grow, to not create more jobs, to not
be able to serve the customer in the best possible way. So that
is the first thing.
The second thing is that when it changes, it is not like
there is a big edict that goes out to everybody and says, this
is how it is changed. This is what you need to do. This is how
you get here. This is what you need to do next. They do not
understand it. They do not know who to talk to. They do not
know what to do next. And it just slows down growth completely.
And for what I look at, and I grew up in a very small
community. Every small business we have in that community,
every franchisee in that community, is an important part of
creating jobs for what we do. And if we cannot grow them,
because they do not know with the changes in how the SBA is
lending, one of the things that we see is SBA is pretty good at
getting somebody the funding when they are just opening. But
when they go to expand, the rules are so onerous, they cannot
figure out how to get more funding to expand.
Chairwoman VAN DUYNE. Thank you very much for that. We are
now going to go on and recognize some of our other Members
who've got questions. And I now recognize representative Crane
from Arizona for five minutes.
Mr. CRANE. Thank you so much for holding this hearing
today, ma'am. Thank you guys for coming. Ms. Thompson, thank
you so much for your service. We appreciate it. Have you guys
noticed that because of the uncertainty of some of the
regulations that have been coming down from this
administration, a lot of entrepreneurs will just completely go
around or forego even talking to some of your more traditional
resources for gaining capital? You were talking about seed
investing, angel investing. Have you noticed that a lot of
entrepreneurs will just go straight to those sources instead of
going to banks and the SBA?
Mr. SHAH. Yes, I have definitely noticed a lot more of
that. I can say from my perspective and the type of businesses
that I have run in the technology sector, where it is software
based, it is extremely difficult, if not almost impossible to
go get traditional lending because we do not have physical
assets, such as a physical location, physical assets, they do
not really deem software as something that is able to be
collateralized. So, it is very, very difficult. And so
therefore, private equity, whether it is angel investors, seed
rounds, or venture capital, is just the route you have to take,
and there isn't really a lot of other financing options.
Mr. CRANE. Yes. Thank you. Ms. Thompson, how is it in the
record high inflation that we are seeing right now? How is that
affecting your franchises that you represent?
Ms. KENNEDY THOMPSON. It is affecting them on just about
every single level. Their supplies have gone up dramatically.
They cannot pass those costs on to the customers in the right
price increases that they need to access to capital is costing
them more. That is why I am here talking to you about private
equity, because it is proven to be a good source of finding
capital for our franchisees. It is costing them more on how
they are engaging and hiring employees. It is costing them on
what their rent is.
Mr. CRANE. Yeah.
Ms. KENNEDY THOMPSON. And in every way, it is affecting
their profitability.
Mr. CRANE. Have you seen it stopping growth within the
franchises that you represent?
Ms. KENNEDY THOMPSON. Yes, I have. I have seen it in people
wanting to expand because the interest rates are too high or
the cost of the supplies are too high for them. And so right
now they are holding. They are holding and waiting to see what
is going to happen next.
Mr. CRANE. So a lot of people do not understand the
trickle-down effect in a business because they have never owned
a business. When business owners start to feel pinched, how
does that affect the people that many of us here represent, you
know, the average American citizen. Does it mean they do not
get raises anymore? Does it mean they get laid off? How does
that affect the little guy out there?
Ms. KENNEDY THOMPSON. Well, when you see things like the
inflation we are seeing now, first of all, it means fewer jobs,
because probably one of the best job creators out there are
small businesses, and they stop hiring. And then if the costs
get too much and they think they have to pull back, then they
actually do layoffs as well, and they cannot do the raises for
everyone the way they would need to, and they cannot put money
back in their community. Small businesses are probably some of
the best groups of individuals that give back to their
communities, both philanthropically and in other ways, and they
cannot do that either. But I think the biggest thing is it
means fewer jobs out there.
Mr. CRANE. What about crime, Ms. Thompson? Have you seen
crime heavily influence and affect the franchises that you
represent?
Ms. KENNEDY THOMPSON. Yes, we have. It is interesting. Most
of my franchise owners will have between three and seven vans
that go out and service customers. We used to see, per
franchise owner, maybe one van every couple of months that
would be broken into. It is a weekly occurrence for our
franchisees now. They have to have extra security, which, of
course, costs them. They come in and their van is broken into,
all their equipment is gone, and then the new equipment they
have to buy costs even more than what they originally had.
Mr. CRANE. Yeah. Besides imposing regulations that prevent
access to capital, what other regulations are you guys seeing
out there on the ground from this administration that are
affecting small businesses?
Ms. KENNEDY THOMPSON. The one that really worries me is the
Congressional Review Act. It has the potential to completely
undermine the franchise business model. The National Labor
Relations Board, or the NLRB, has issued a final rule on a
joint employer standard that would reverse this course back to
the harmful 2015 version. This takes away the equity and the
independence of the small business owners. And I would like to
remind most that many of our small business owners are women,
people of color, and veterans. While the average business,
small business in the United States has 17 percent, people of
color running that or owning their business in franchising is
26 percent.
Mr. CRANE. Thank you for bringing that up, ma'am. I
appreciate it, and I yield back.
Chairwoman VAN DUYNE. All right, we are going to go ahead
and go into a second round of questions I wanted to ask you,
Ms. Kennedy Thompson, if you would mind just, kind of,
following up a little bit. You have talked about some of the
experiences that you are seeing in general. But specifically
for your experience, how has private equity helped grown your
business, your franchise? What have you seen?
Ms. KENNEDY THOMPSON. Yes. So, on the franchisor level, we
also have private equity sponsorship. And I can tell you, when
I started in this company, we had six brands, and today we have
30 brands. We went from doing 400 million to 4 billion. And it
is a direct relationship to the sponsorship, thought-
partnership, and help that we have gotten from private equity.
They put the right resources to help us find great talent; the
right resources to get us the right capital to be able to
acquire companies and grow and better serve our customers.
Because you can imagine in the home services, I might not
always need a plumber, but I do need a plumber, and a maid, and
I need my sidewalks cleaned, and I need my windows cleaned. And
so, it allowed us to better take care of our customers by being
able to build this company that has all the things to repair,
maintain, or enhance their home or property. And then for us,
you are only as good as the people that you have on your team.
And they have helped us really find great talent to be able to
serve our franchisees in the best possible way to support them
and help them grow their businesses.
Chairwoman VAN DUYNE. Thank you very much. Mr. Shah, have
you had to make any adjustments to your business operations or
strategy to comply with regulatory requirements, either with
private equity or with private credit?
Mr. SHAH. We haven't done too many adjustments yet.
However, because of new regulation, we have seen a number of
new types of private financing occur. Different types of debt
financing, convertible note financing, just different type of
private markets to make it easier to raise capital in the
financing markets without having to potentially provide all of
the information at the level we are at. Providing a lot of this
information and data, it is a lot of cost early on to a small
business, a lot of legal fees that we cannot afford. And so, we
have had to have, kind of, become smart and raised capital in
different ways.
Chairwoman VAN DUYNE. We have heard from business owners
that geographic location is a major limiting factor when trying
to access venture capital financing. Have you encountered this
issue, and if so, what do you think can be done to expand these
options outside of Silicon Valley?
Mr. SHAH. Absolutely. I have faced these issues lots of
times. I lived in the Midwest my whole life, and I love the
Midwest. But it is very difficult to raise capital for software
tech companies there compared to the coast, especially in
Silicon Valley. We have, thankfully, successfully raised
financing from Revolution Rise of the Rest here in D.C., and
their entire mission is around making it more accessible for
venture capital throughout the non-Silicon Valley, Boston, New
York, sort of hotspots.
One of the things that we can do is by making it--adding
regulation that allows for more credits to occur or matching
programs to occur between investors and entrepreneurs that are
starting businesses. As I mentioned earlier and in my written
testimony, it is very difficult for us to get traditional
financing, whether it be SBA or via a traditional bank. And so,
to offer alternatives to allow for that to be easier and risk
to occur to start these small businesses, I think would be a
long way forward in helping more cities gain exposure.
Chairwoman VAN DUYNE. Excellent. Thank you very much. I now
recognize Rep. Gluesenkamp Perez from Washington for five
minutes.
Ms. GLUESENKAMP PEREZ. Thank you, Chairwoman, and thank you
to our witnesses for being here today. Professor Kress, we know
that 40 percent of the nation's small business lending
originates from community banks. These banks are an incredible
asset for our communities. They know their customers
inherently. They know the people around them. But I hear from
the small community banks in my district that they can no
longer compete given the competition from the big guys. You
mentioned that these community banks, which we know serve our
small businesses very well, have borne the brunt of banking
consolidation trend. You also note that research from the
Federal Reserve Bank in Philadelphia has documented that large
acquiring banks divert small business lending from their target
communities to the acquirers communities, leaving the target
communities worse off. So, I wondered if you could talk about
the impact of banking consolidation on our small businesses and
what should be done to stave off these effects.
Mr. KRESS. Absolutely. Thank you for the question. And I
note that Ms. Kennedy Thompson mentioned in her testimony that
she and her businesses have felt the effects of bank
consolidation as well, because, as you noted, community banks
tend to focus much more heavily on small business lending. They
engage in what is known as relational lending because small
community bankers know their communities. They know the
businesses in those communities, they know the local business
environment, and so they have the soft information that they
are able to use to more accurately underwrite small business
loans.
I attribute a lot of the problem to bank consolidation and
lax merger oversight; 7500 community banks disappeared due to
mergers between 1984 and 2011. Those are 7500 community banks
that are no longer able to provide small business loans to
entrepreneurs in their areas. The White House issued an
executive order on competition in 2021, urging the Department
of Justice and the banking agencies to develop a plan to
revitalize bank merger oversight. Progress on that front has
been slow, but there are encouraging signs. I think Assistant
Attorney General Kanter has outlined a framework for how he
might think about promoting competition and focusing in
particular on small business lending and protecting that as
part of the bank merger oversight process. But maintaining a
robust community bank system is absolutely critical to ensure
small businesses access to credit.
Ms. GLUESENKAMP PEREZ. Thank you. I am also interested in
hearing directly from our small businesses about the options
available to both of you. Ms. Kennedy Thompson and Mr. Shah, a
question for both of you. You have chosen private equity,
venture capital, and other private investment strategies over
the course of your career rather than utilizing an SBA
structured product. And I wondered, why did you choose a
private investment over SBA's guaranteed loans? What barriers
or difficulties did you see in working with the SBA?
Mr. SHAH. Thank you for that question. For us, it was
simple. We didn't have the collateral that the banks or the SBA
required. You have to be either individually wealthy and
provide those assets, or you have to have a business that has
assets for it to work. And we didn't have either. And
therefore, it wasn't an option for us.
Ms. KENNEDY THOMPSON. And for us, it was the speed to
market. How fast could we move? How fast could we take care of
our franchisees, and how fast could we take care of our
customers? And private equity, frankly, allowed us to move
faster.
Ms. GLUESENKAMP PEREZ. Hmm, okay. How can the SBA process
be improved so more small business owners choose to utilize and
view it as a viable option?
Mr. SHAH. I think Ms. Thompson just said it as well, is
speed for businesses. Small businesses do not have the time and
the luxury to wait, you know, years to figure this out and go
through a process of denial where private investors are giving
you responses pretty immediate. Even if it is no, it is still
pretty immediate. And I think that, again, we need to change
the collateral requirements to be more in line with the new
economy versus the old economy.
Ms. KENNEDY THOMPSON. One of the reasons that speed is so
important as a small business owner is you have to be able to
pay yourself. There are three things you have to do. You have
to pay yourself. Pay down debt. Put it back in the business.
And if you cannot pay yourself, you are not going anywhere. And
so, if it takes months and months, you end up having to go do
something else.
Ms. GLUESENKAMP PEREZ. Mm-hmm. Yeah, I bought a building. I
own an auto repair shop with my husband, and we bought a
building with a 504 loan. The only reason it worked was because
the sellers, they were committed to seeing that property remain
in the trades. And so, you know, God bless them for that. But
that is so rare. And we shouldn't--we cannot let our small
businesses be at the mercy of someone's good intentions. So,
thank you both so much for being here. I yield back.
Chairwoman VAN DUYNE. Thank you. I now recognize Rep. Bean
from Florida for five minutes.
Mr. BEAN. A very good morning, Madam Chair. And good
morning, Small Business. To our witnesses, welcome. We are glad
to have you here. How bad is it on a scale from 1 to 10, 10
being atrocious, zero, not at all a problem, the regulatory
environment? Madam Chair, in her brilliantly debated opening
statement, really nailed it with the amount of the regulations
that are, that she says strangling small business. Is she on,
or is that just made up, all the regulations? So, give me--is
it really bad, a scale from 1 to 10, how bad is it, new
regulations on small business? Mr. Shah?
Mr. SHAH. I think it is different for every type of small
business. We work with a lot of independent restaurant owners,
bars, breweries, and I think it is extremely bad for a lot of
them.
Mr. BEAN. You would say over what number?
Mr. SHAH. Probably over seven.
Mr. BEAN. Okay.
Mr. SHAH. They are absolutely feeling it right now. For
tech companies like ourselves, we also, I would say, are
probably a little bit lower just because we have access to
different financing options.
Mr. BEAN. Yeah.
Mr. SHAH. But in the last few years, as I have said in my
testimony, that has also shrunk. The access to capital has
shrunk. With interest rates being as high as they are, there is
less capital being deployed in the private markets as well.
Mr. BEAN. Seven.
Mr. SHAH. And so----
Mr. BEAN. Seven.
Mr. SHAH.--that is affecting us a lot----
Mr. BEAN. Ten-four.
Mr. SHAH.--at the moment.
Mr. BEAN. Ms. Thompson, what say you?
Ms. KENNEDY THOMPSON. Well, I was thinking a seven.
Mr. BEAN. Seven.
Ms. KENNEDY THOMPSON. And I say the only reason it is not
an eight is because we found other ways to work around it.
Otherwise, it would be an eight-plus to a nine.
Mr. BEAN. Ten-four.
Ms. KENNEDY THOMPSON. We have got to find ways to get them
to move faster.
Mr. BEAN. Gotcha. Mr. Jeremy, what do you say?
Mr. KRESS. I would just note from an access to capital
standpoint, that from a data driven perspective, and with all
due respect to colleagues who run small businesses, but Fed
data show that the growth of bank loans to partnerships and
proprietorships has been positive for every year from 2011 to
2021, and it only dipped negative as a result of the pandemic.
Mr. BEAN. What does that mean in a number? On our Bean
scale from 1 to 10.
Mr. KRESS. The Fed researchers characterize small business
loan growth as robust.
Mr. BEAN. Yeah.
Mr. KRESS. So, looking at it solely through the lens----
Mr. BEAN. Taking that number----
Mr. KRESS.--of that data, I would put it below five.
Mr. BEAN. Below five. All right. Ten-four. I will accept
that answer. Why not just go to the bank? Mr. Shah, why can't
you just go to the bank? There is a bank on every corner. Is a
bank an option or not an option for capital?
Mr. SHAH. For us, it is not an option because we don't have
the traditional capital required. We don't have physical
assets. Our assets are code written on a computer. They don't
deem that as worth it in terms of loaning against it. Also, in
our business, there is a lot of private companies that will
loan against revenue or cash flow. But businesses
traditionally, or banks traditionally, do not loan against
that; they loan against collateral. So, for us, it is really
never been an option.
Mr. BEAN. Ten-four. Now, Ms. Thompson, you are in the
franchise. I see a hater behind you. You are in the franchise
world.
Ms. KENNEDY THOMPSON. I am.
Mr. BEAN. Why can't you go to a bank? Is it, Mr. Shah on
that?
Ms. KENNEDY THOMPSON. No. Sometimes we do go to a bank.
Sometimes, especially when they are beginning out. What
happens, though, is with the mega mergers, those relationships
that the local community that we just talked about earlier,
they are just not there anymore. And so, they do not go because
they do not know where to go and they do not know who to talk
to.
Mr. BEAN. Mm-hmm.
Ms. KENNEDY THOMPSON. And they have to find a way to have a
relationship with somebody that will help them build their
business. And the megabanks, they are not looking at how your
profitability and how you are growing. They are just looking
at, are you paying the loan down? Whereas private equity, it
matters to them where your profitability is because they are
not going to be able to exit without a strong profitability.
So, there is high alignment.
Mr. BEAN. Gotcha. Is it much more expensive, private
equity, Mr. Shah, would you say, is it much more expensive or
you just need the capital? We got to go. You got a great idea,
you are ready to go. And I sense that time is money to you. Is
that correct?
Mr. SHAH. Yeah, but I don't think it is actually more
expensive because there is a lot of things, if you choose the
right partners in the private equity world, they can actually
accelerate your business. Banks, for the most part, aren't
going to provide you with advice, expertise, access to other
capital, connections in your industry to grow your business.
They are just going to provide you the capital, typically.
Mr. BEAN. So it is kind of like Shark Tank. You get
somebody that is going to be there and they are going to
hopefully work with you.
Mr. SHAH. Exactly. They understand us. A lot of them are
former founders. They get that we are going to go through ups
and downs, and they are going to be there for us the entire
way. Again, you have to find the right partners, but those
partners exist.
Mr. BEAN. Gotcha. Ms. Thompson?
Ms. KENNEDY THOMPSON. Mr. Shah said something earlier about
how you can also help your employees. What I like about private
equity is every single time they have helped us help our
employees as well. When we exit, they exit with a strong exit,
too. So, we actually get to transform lives.
Mr. BEAN. Ten-four. No, I appreciate that. As a small
business owner, formally, it is hard enough when in a perfect
environment, let alone when the government continues to put new
and harder regulations. So, thank you for being here today.
Madam Chair, I yield back.
Chairwoman VAN DUYNE. Thank you. I now recognize
Representative Alford from Missouri for five minutes.
Mr. ALFORD. Thank you, Chairwoman Van Duyne, good to see
you. Thank you all for being here on your own time and own
dime, as I like to say. It is a great investment in Main Street
America for you to be here. Small businesses are the fabric of
America, and I am proud to be a part of this committee where we
are trying to make sure that people have the capital and the
resources needed to not only start new businesses, but to
maintain them in America.
As you well know, today, businesses are already struggling
under rampant inflation, ongoing supply chain issues, workforce
shortages, burdensome regulations. On top of these issues, the
Biden administration is pursuing antigrowth policies such as
Basel III, further shrinking access to capital. President Biden
also vetoed partisan legislation that would undo the CFPB's
Section 1071 reporting requirements that would further burden
small businesses' ability to access capital. With the shrinking
availability of capital from the banking industry, small
businesses have turned to alternative sources of capital, such
as private equity. Private equity is an essential tool for
small businesses looking to access capital and actually grow.
In our district alone, there was $1.4 billion of private credit
investment in 2022.
Unfortunately, the Biden administration cannot abide any
pathway for main street to grow and has released a new merger
guidelines through the FTC and DOJ that curtails private
equity's ability to invest. By the FTC's own estimate, the new
merger guidelines would lengthen the process for filing by 300
percent. I feel that is unacceptable.
Over the next decade, compliance with President Biden's
regulations will cost Americans more than $1.5 trillion. Let
that sink in. Ms. Kennedy Thompson, thank you for being here
today, and I like your pink.
Ms. KENNEDY THOMPSON. Thank you.
Mr. ALFORD. Can you please speak about how securing capital
from private equity impacted your business?
Ms. KENNEDY THOMPSON. Certainly, I would be most happy to.
There is many levels that has impacted us so from the
franchisor side. We are in our fifth hold period with private
equity. When I came into the company, we were doing 400 million
with six brands. Today we are doing 4.1 billion with 30 brands.
And it is a testament to the private equity investment that our
PE sponsors have made with us and helped us. And along the way,
as we have grown, we have been able to grow our franchisees as
well because we have had the right resources at the right time
to bring in the right talent to be able to have the right
access to capital, so we could buy some of those companies to
be able to provide our customer the right and best experience.
And then to our franchisees, we have many that are ready to
grow, and they are finding access to capital quite difficult.
And the smaller PE companies are coming in and being thought
partners to them. Introducing them to the right partners, and
to the right suppliers, and helping them grow their businesses
as well.
Mr. ALFORD. Very quickly, where would you be today if it
weren't for those investments?
Ms. KENNEDY THOMPSON. That is a great question. I certainly
don't think we would have 30 brands doing 1 billion. I don't. I
was there at the early days, and we are a completely different
company with really great resources at our fingertips. And what
is most important is it is helping us grow our franchisees.
Mr. ALFORD. Mr. Shah, in your remarks, you spoke about how
SBA loans are a key avenue for many businesses to access
capital. However, you noted that the majority of these loans
require some form of physical asset to secure. How can the SBA
better support small businesses in the tech space, such as your
own?
Mr. SHAH. That is a great question. I think something needs
to change on that side. What they can do is, I think they can
use the private markets to understand collateral. So, for
example, if you do receive private equity, the SBA can come in
and provide additional capital on top of the private capital to
further grow that business. There are also ways that we can
look at collateral differently today than what historically has
happened. You can use revenue growth or traction or other
metrics that are not physical assets in the eyes of what I
would say is a traditional physical asset. So, I think a lot of
those avenues need to change as well.
So, I would say the biggest part for us is the private
markets, and allowing us to use the private markets to help
with the SBA loans.
Mr. ALFORD. Thank you so much. Thank you again to our
witnesses, and with that, I yield back, Madam Chairman.
Chairwoman VAN DUYNE. Thank you very much. I would also
like to thank our witnesses for your testimony and for
appearing before us today. Without objection. Members have five
legislative days to submit additional materials and written
questions for the witnesses to Chair, which will be forwarded
to the witnesses. I ask the witnesses to please respond
promptly. If there is no further business, without further
objection, the committee is adjourned.
[Whereupon, at 11:01 a.m., the subcommittee was adjourned.]
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