Often, yes, especially if you plan to buy more than one business or bring in investors. A holding company owns the operating company; the buyer owns the holding company. Lenders are comfortable with it, but they lend where the cash and assets are, so they will make the operating company a borrower or guarantor, take a lien on its assets and a pledge of its shares, and take personal guarantees from the owners behind the holdco. SBA lends to this structure too, with its own rules. The key is to agree the structure with the lender before closing, not after.
- What a holdco is
- A company whose main asset is the shares of one or more operating companies
- Where lenders lend
- Where the cash flow and assets are: the operating company, directly or through its guarantee
- What lenders take
- Opco lien and guarantee, pledge of opco shares, holdco guarantee, owners' personal guarantees
- SBA's position
- Allowed, with the operating company on the loan and guarantees from 20%+ owners, looked through the holdco
- Why it matters later
- Add-ons can join the existing loan as new subsidiaries instead of standing alone
What the structure is, and why buyers use it
In a holding company structure the buyer forms a company, the holdco, that owns the operating company, the opco. In a stock purchase the holdco buys the target's shares, and the target becomes its subsidiary. In an asset purchase the holdco forms a new opco, which buys the assets. The buyer, and any partners or investors, own the holdco, not the business directly.
Buyers choose it for reasons that have little to do with the first loan. A holdco gives a single place for investors, partners and rollover equity to sit. It lets a second or third acquisition be owned beside the first, each in its own company, so that a lawsuit or a failed location in one is kept away from the assets of the others, except where a lender has taken cross-guarantees. It makes a later sale of one business, or of the whole group, cleaner. And it can separate real estate into its own company that leases to the operating business, a propco-opco structure.
What it does not do is shield the group from the acquisition lender. Lenders take guarantees across the entities precisely so that the separation buyers want for other creditors does not apply to them.
How lenders take guarantees and security across both
A holdco on its own has no revenue and no operating assets. If it borrows and the opco does not guarantee, the holdco's lender stands behind every creditor of the opco, from trade suppliers to the landlord, because the holdco's only asset is its equity in a company that must pay its own creditors first. That is structural subordination, and senior lenders do not accept it. So whichever entity is named as borrower, a senior lender ties both together.
| Structure | Borrower | What the lender takes | Where it fits |
|---|---|---|---|
| No holdco | The operating company | Lien on opco assets; personal guarantees from the owners | A single business with one or two owners and no plans to add more |
| Opco borrows, holdco guarantees | The operating company | Lien on opco assets; holdco guarantee and pledge of opco shares; personal guarantees | Common for bank and SBA acquisition loans; keeps the loan where the cash is |
| Holdco and opco as co-borrowers | Both, jointly and severally | Liens on both; pledge of opco shares; personal guarantees | Stock purchases where the holdco buys the shares; see joint and several borrowers |
| Holdco borrows, opcos guarantee | The holding company | Upstream guarantees and liens from every opco; pledge of all opco shares | Groups with several operating companies and lenders set up for multiple subsidiaries |
| Propco beside opco | Opco for the business loan; propco for the real estate, or both as co-borrowers | Mortgage on the property; lease from propco to opco; cross-guarantees | Acquisitions that include the building; see acquisition with real estate |
Cash has to move up for a holdco to service anything. The loan agreement controls that through a restricted payments covenant, which typically allows the opco to pay the holdco what it needs for debt service, taxes on pass-through income and modest overhead, and limits distributions beyond that. Owners of pass-through entities should read how tax distributions are handled; see tax distributions under a loan. The broader trade-off between lending at each level is covered in holdco vs opco as borrower.
SBA and the holding company
SBA finances operating businesses, and it does not treat a holdco as a way around that. When a holding company buys a business with a 7(a) loan, SBA lenders put the operating company on the loan as a co-borrower, so that the entity generating the cash is directly liable. A passive company that only holds shares is not, on its own, the kind of business SBA lends to.
- Guarantees look through the holdco. Every owner of 20% or more personally guarantees an SBA loan, and ownership held through a holding company counts; the holdco itself, as the owner of the operating company, guarantees too. A holdco does not let a 20%+ owner avoid the guarantee; see the 20% owner guarantee.
- Affiliates count together. SBA looks at a borrower and its affiliates as a group when applying size standards and its loan limits; see SBA affiliation rules. 7(a) loans go up to $5 million, and SBA's guaranty to one borrower is capped at $3.75 million, so a second acquisition in the same group draws on the same limits.
- Real estate can sit in its own company. SBA allows an eligible passive company to hold the property and lease it to the operating company, with the operating company on the loan as co-borrower or guarantor.
- Equity still comes from the buyer. In a complete change of ownership the injection must be at least 10% of total project costs, whether it is paid into the holdco or the opco, and it must be documented to its source.
- No distributions from proceeds. SBA loan proceeds cannot fund a distribution to owners, so the holdco cannot use loan money to return capital to its investors.
Where investors own the holdco alongside an operator, the ownership table decides who guarantees and whether the deal is a complete or a partial change of ownership. Those questions are easier to settle while the structure is still on paper; see buying a business with partners or investors.
Why the holdco matters for the next acquisition
The strongest case for a holdco appears at the second deal. If the first business was bought directly, with the opco as the only borrower, an add-on has nowhere tidy to go. It can be bought by the opco and merged into it, which mixes the two businesses' liabilities. It can be bought by the owner personally in a new company with its own separate loan, which leaves two lenders, two sets of covenants and two sets of personal guarantees with no link between them. Or the owner can reorganize under a new holdco first, which means asking the first lender's permission.
With a holdco in place from the start, the add-on becomes a new subsidiary. With a conventional or private credit lender, it can join the existing facility as an additional guarantor under a joinder, and be financed from an accordion or a delayed-draw term loan sized for it, subject to the lender's approval of the target. On SBA loans, the add-on usually needs its own loan, but inside a group whose structure the lender already understands. More on building a platform is in financing add-on acquisitions.
If more than one acquisition is the plan, say so to the first lender. The loan documents can be written to receive the next company instead of blocking it.
Why the structure must be set with the lender before closing
Loan documents describe the borrower, its owners and its subsidiaries exactly. A change to any of them after closing, such as putting a holdco above the borrower, moving the shares, or merging an entity, is usually a change of control or a prohibited transfer unless the lender consents. Consent is not guaranteed, and when it is given it comes with work.
| Set before closing | Changed after closing |
|---|---|
| Borrower, guarantors and pledges agreed in the term sheet | Lender consent needed; may be refused or conditioned |
| One set of loan documents, one set of lien filings | Amended documents, new guarantees and pledges, new UCC filings against new entities |
| Equity injection recorded in the right entity from the start | Equity may need to be moved or re-documented |
| Tax structure chosen with the purchase | A reorganization can carry its own tax cost or need elections |
| SBA eligibility tested once, on the final structure | On an SBA loan, a later ownership change also needs the lender's, and sometimes SBA's, approval |
The practical sequence is simple. Decide the entity structure with the tax adviser and the lawyer before the letter of intent is final. Put it in the lender package, so each lender underwrites the structure that will actually close. Confirm it in the term sheet: named borrower, guarantors, pledges and permitted future subsidiaries. Transparent's lender presentation and underwriting memo set out the ownership chart and the borrower structure for exactly that reason; see the package.
Common questions
- Can a holding company get an SBA loan to buy a business?
- Yes, with the operating company on the loan, commonly as co-borrower. Every owner of 20% or more personally guarantees, including ownership held through the holding company, and SBA counts affiliates together toward its limits.
- Does a holding company protect me from the acquisition loan?
- No. Lenders take guarantees and liens across the holdco and the opco, and personal guarantees from the owners. The holdco separates the businesses from each other's other creditors, not from the lender.
- Should the holdco or the opco be the borrower?
- Senior lenders usually want the opco as borrower or co-borrower, because the cash and assets sit there. A holdco can be the borrower when every opco guarantees and grants a lien, which is common in groups with several companies.
- Can I add a holding company after closing?
- Usually only with the lender's consent, because it changes who owns the borrower. Expect amended documents, new guarantees and filings, and possibly tax work. It is simpler to set up before closing.
- Does a holdco help with add-on acquisitions?
- Yes. An add-on can become a new subsidiary and join the existing loan as a guarantor, or sit beside the first business under the same owners, instead of needing an entirely separate structure.