Times can arise in a company's lifecycle when an investment holding company looks like an ideal solution to a variety of challenges. A holding company can help mitigate risk, protect assets, and enhance the competitive advantages of the businesses it owns through synergies and scale.
The structural flexibility of a holding company can also introduce opportunities to enjoy strategic tax advantages that also benefit subsidiaries and further amplify revenues. (They’re not the only business ownership option with a tax advantage, by the way.)
But depending on where you’re standing, holding companies can also have specific shortcomings. Issues can arise around intense capital requirements, management transparency, and bureaucratic layers.
So is a holding company a good idea, or too risky for your ambitions? Only you can decide — but no one business model is right for every company, so it’s important to get all the facts and consult with trusted advisors.
What is an Investment Holding Company?
An investment holding company is a corporation that owns a controlling interest in one or more companies. A holding company’s primary purpose is to hold and manage investments in one or more subsidiary companies; the holding company may or may not provide direct operational support to the companies it owns.
Investment holding companies come in several forms, including private equity firms and publicly traded corporations. They may be built around an industry vertical or broadly diversified across multiple industries. But they all have the same focus: to maximize investor returns through asset management and capital allocation.
Holding companies often look for businesses with growth potential or companies in need of restructuring or operational improvements. They provide strategic guidance, financial resources, and connections to help grow businesses (i.e., their investments).
Pros & Cons of Investment Holding Companies
Before you decide to sell your company to an investment holding company, it can be helpful to reflect on a few questions:
- What are your long-term goals for your business, and how does a holding company align with them?
- Is your business in a growth, diversification, or exit phase of its lifecycle, where a holding company could provide the support you’re looking for?
- Are you willing to give up partial or total control over the business, along with your ownership stakes?
- Will you and your team be capable of integrating into a new company culture and operating within their expectations?
Your answers depend on the balance you strike between a holding company’s advantages and disadvantages. On the plus side, you may get:
- Access to capital: Holding company resources can provide a much-needed cash infusion to expand or stabilize a business
- Diversification: Diversifying your business can reduce risk and allow for greater growth potential
- Financial expertise: Financial and strategic guidance can help you optimize cash flow and profits
- Operational experience: Many holding companies have vast industry networks, resources, and knowledge bases
- An exit strategy: You can back off from daily operations or exit the company altogether while providing a longer term path for the business
Weigh those advantages against the potential downsides — starting with a loss of control. A holding company’s controlling interest may require you to give up considerable decision-making authority, and not all entrepreneurs can live with the added bureaucratic layers. Integrating a long-established or tight-knit team into a holding company with a vastly different culture can create a mismatch that can be hard for you and your employees to accept.
And a holding company’s structure may mean your business pays management or other service fees, the cost of which could create problems down the line for your business. It bears repeating: always read the fine print.
Should You Invest in Your Own Holding Company?
On the other hand, you might think about starting a holding company as a strategic, portfolio-expanding move to diversify your investments and get closer control over your assets. But are holding companies good investments?
If the idea appeals to you, these questions can help you decide whether to investigate the holding company option with a professional:
- Do you have the capital to proceed?
- Do you have the expertise and experience to manage the enterprise?
- What are the holding company’s purpose and goals?
- What legal structure will you use?
- What is your holding company’s acquisition strategy?
- How will you mitigate investment risks?
One last thought as you explore your ownership transition and/or business growth strategies: You deserve fair market value for your business. An employee stock ownership plan creates a buyer for your company that’s guaranteed to pay fair market value.
What’s Your Next Step?
Whether you’re looking to sell part or all of your ownership stakes, or you need a strategy to scale and grow your company, a holding company is just one of the options available to you. And if it’s a flexible exit strategy you’re looking for, you deserve to know about all your options.
Learn more about your succession planning options, and how various exit strategies’ pros and cons stack up against each other. Download our free ebook by clicking below.