November 25, 2019
Holding companies, or those businesses started with the intention of owning equity shares in other companies, are an incredibly attractive investment option for many. Despite the allures associated with holding companies, however, many entrepreneurs and investors know next to nothing about actually starting one, let alone running it successfully for years on end. Whenever you attempt to establish a holding company, you should do so cautiously and thoroughly so as to ensure the greatest chance of commercial success.
Here’s what to consider when setting up a holding company, what you can expect to confront once you take off, and how to avoid disastrous mistakes.
Holding companies help manager risks
Why do people invest in holding companies, anyway? By and large, holding companies are useful when it comes to mitigating risks and closely protecting your well-diversified assets. The holding “parent” company easily oversee the intellectual property rights of the various “child” companies under its purview, for instance, demonstrating why so many entrepreneurs and investors with wide-ranging investments in a wide variety of areas may find holding companies to be so attractive in the first place.
It’s certainly true that holding companies protect your assets to some great extent, though you should understand that it’s impossible to entirely separate yourself from some risks in the market. It’s worthwhile to take a deep dive into how holding companies protect business assets, as investors who fail to understand this facet of holding companies will never be able to grasp why they’re so widespread in the first place. An operating entity that actually does business with customers need not possess assets which could be lost in the event of a lawsuit, for instance, if it has a parent holding company that possesses those assets on its behalf.
It should thus be of little surprise why industrial holding companies are gaining steam these days. As business owners and investors seek to diversify their portfolios, the existence of holding companies offers them a helpful tool in doing so that also protects them against certain risks that could end up costing them huge sums of money. It’s worthwhile to discuss liability and holding companies in-depth, as many business owners who opt to create a holding company do so in order to avoid future liability claims that could end up being incredibly costly.
The easiest way to describe how holding companies protect you from liability claims is by explaining that they’re technically different legal entities from the other, traditional businesses that you’ll own.
A holding company is a different legal entity
If you own a brick-and-mortar store that does business with customers every day, it’s only a matter of time until you face some kind of legal jeopardy. When tragedy does inevitably strike, you’ll be able to avoid the brunt of legal damages by having a holding company that’s technically a different legal entity from your brick-and-mortar store. Thus, when customers sue your store and seek your assets in the form of damages, you’ll be able to safely shield many of your assets from their grasp by having them safely stowed away in the parent holding company.
When setting up your own holding company, you need to understand that there are different types of holding companies which serve different purposes. Your holding company could be an LLC or a corporation, for instance. Set some time aside to read up on which kind of holding company may be the best for you, as every entrepreneur and investor will have to make that choice individually if they want to reap the greatest benefits for themselves. Remember that a model which works for one entrepreneur or investor may not necessarily be the best one to rely on for another.
All holding companies need solid acquisition strategies, too; if you want to expand, you’ll do so by acquiring equity shares in another business. You’ll want to be familiar with how acquisitions are carried out in the marketplace if you want to succeed. Similarly, finding an appropriate financier for your holding company will be important, as very few entrepreneurs or investors have the personal financial heft needed to single-handedly finance an entire holding company. As always, you’ll need to keep financing on your mind at all times if you want to earn a buck through establishing a holding company.
Holding companies are excellent for those looking to speed up their rate of acquiring different companies, and can help shield your assets in the event of a legal fiasco. Remember to always have sound financial footing under you, however, or else your holding company could end up overextending itself. Before long, you’ll discover that while running a holding company can be difficult, it’s ultimately very rewarding when it comes to managing a sprawling business empire, shielding your personal assets from harm, and scooping up other companies who are a threat to your business.