Org Chart Question for SBA Lenders
January 27, 2024
by a searcher from Harvard University in Manhattan, New York, NY, USA
Question on Organization Chart/Structure for the SBA Lenders or search funders with experience scaling location-based business strategies... beginning with some personal context.
Quick Background: I am trying to set up a "Permanent Capital Model" where I buy and hold businesses for the long-term, developing skills as a business owner and scaling my team and our targets over the years ideally into several verticals (would be the dream). I have a background in PE after several years at funds in NYC, and in 2023 quit my job and made my first acquisition -- SBA 7(a) loan funded. We purchased a non-medical pet services business and I plan to continue to acquire these facilities over the coming years to set up reliable FCF before adding other business verticals that have more of an outbound/sales shape.
Org Chart - Thoughts on C-Corp: It is clear that I want to keep all of the capital/lifeblood inside of the system in a tax-optimized way, and that we have a longterm view on our positions in business. To me this suggests going for a C-Corp holding structure for the operating businesses as the master-entity at the top, and having that C-Corp own the operating businesses (say they are LLCs) that are all pass-through entities in terms of tax up to the C-Corp. This way I can still have individual business units for each location and have employment contracts at each entity, business risk quarantined to a certain extent at each location, etc., and still have the money flow up to the top at the C-Corp level who will decide what the next best use of cash is in realtime. I like that the cash is not taxed as income (like in a partnership/LLC) and I don't mind the concept of double-taxation on distributions because I have no intention of making distributions anytime soon and my investors are of the same mind.
Question on Org Chart: To the lenders -- is it possible to achieve this kind of a "multi-layered structure" and still do so with SBA loan vehicles? I frankly don't care what level the debt sits at whether you want to load it deal-by-deal at the LLC level, or if you want to continuously resize it at the C-Corp holdCo level -- so long as we get the funding. I understand I need to continue to sign the personal guarantee until kingdom come and am prepared to do so.
I have received a lot of friction from my current SBA lender, and my handler (candidly) doesn't really understand or have experience with the org chart decision of changing from LLCs or an S-Corp into a multi-layered C-Corp holding company, but he is coming around to understanding why I think we want to do this and why it makes sense when you're taking a 10-year+ view on your structure upfront.
Is there any ban against this or any reason this can't be done? Are their any lenders with experience achieving this kind of structure? I don't really understand the friction (assume ownership is exactly the same in terms of who the members/stockholders are for the LLCs & for the C-Corp) especially when you trace it to the top and see the same name you were lending to and the same guy willing to do the PG -- this is just tax optimization / the organizational structure we think we want to go with.
If for some reason SBA lenders/loans won't do this -- is there any advice on getting this done? Is this just a bad idea and you should go around collecting several LLCs or S-Corps if you want the self-employment tax optimization? Or is there a time when yes this does make sense, but you need a "commercial" debt partner to make it work? Or is this kind of move really only seen within PE. I feel like the friction I have gotten in screening this idea with lenders has been confusing to me and I'm looking for some answers...
Thank you for your time and consideration!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) At the end of the day only your C-Corp will be filing the tax return. However, lenders will likely want a breakdown of the operating performance for reach individual entity. So you will need to keep separate books for each entity (it sounds like this is your plan anyway) and probably will need to hire an accounting firm to do a year-end consolidated income statement and financial statement for all entities (once you get to the point you have multiple LLC's). This is going to be important on multiple levels. First, it will allow lenders to see how the business(es) they have financed is operating, and important if you eventually have to use different lenders. Secondly, if you ever decide to sell one business, it is going to make it substantially easier to sell the business, especially if the buyer wants SBA financing on the acquisition, as you have support for that specific businesses cash flow.
2) The SBA lender is going to require your C-Corp to be a co-borrower or corporate guarantor on each loan that is done. So in essence all business units get crossed into each loan indirectly through this guarantee, but the senior lender on each individual loan will have the priority lien on the individual LLC's. Not sure if this is an issue for you, but I wanted to make you aware up front.
3) If you just closed on your first deal and you are making a change in ownership during the first year, that ownership change needs to be approved by the SBA. After the first year it needs to be approved by your lender. Your lender could choose to withhold approving that change. Just something you would need to address to properly put it in place this structure on your existing deal. In theory the lender could cause a default if you changed the ownership without their approval. However, if you still own 100% but it is now just through another entity, it should not be a big deal because there has been no material change, just another entity but in the middle.
4) If you are targeting a roll-up strategy you could loose one beneficial financing option available under the SBA 7A loan program. Right now if you buy a business to merge into another business you already own that has the same six number NACIS code you can finance 100% of the acquisition of the second business if you are rolling it into your existing business. If you are going to do that purchase and not merge it with one of your existing entities with the same NACIS code, I do not believe it will work. Unless the C-Corp has the same NACIS code as well. But if you buy some companies with slightly difference NACIS codes over time, then I think it would have to be merged into one of those with the matching NACIS code. That can cause some complexity with your existing lender.
5) Lastly, with SBA 7A lending if you look to do any additional debt involving your existing entities (holding company or LLC) you would need to go back to your existing lender first. If they say "no", then you can go to another lender. We have had success in the past getting other lenders to do acquisitions when the existing lender is not willing to do so, but it is always slightly harder to get done because the new lender is in a second position on all existing business assets. Although the new lender can get a first lien on the assets of the new company you are buying and putting into a new LLC because they can get a purchase financing UCC that takes priority on those specific assets, the lender does need to deal with the other liens in place on the holding company. Again, not impossible to do, but there is another step of having your existing lender say "no" first, then explaining to other lenders why they were not willing to do it and why the new lender should want to do it.
I hope this information is helpful. I would be more than happy to jump on a call to discuss any of this in more detail. You can reach me here or directly at redacted Good luck.
from Harvard University in Manhattan, New York, NY, USA