[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.] A P P E N D I X [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]