Hold Up! How Holding Companies Benefit Small to Midsize Business Owners

That Warren Buffett fellow is really onto something, and that’s not even considering his inclusion on the Forbes 400.  So, what exactly is he onto?  Glad you asked!  His company, Berkshire Hathaway Inc., is the gold standard of a holding company (holdco).  Hold up, what was that term?  A holdco, sometimes known as a parent company, is an entity that owns investments in the form of stocks, bonds, other companies (operating companies/opco), or anything of value.  With the definitions out of the way, we can move on to how a holdco can help SMB owners.

As we have said in earlier articles, outside of generating a profit, the key purpose of any corporate entity is asset protection for its owners.  (Click Here and Here)  But how many entrepreneurs get other ideas to increase their revenues, which might not match their current business?  That answer is unsurprisingly a lot.  So, what happens if you run two opposite businesses through one entity?  That’s right – increased liability exposure.

What’s the best way to deal with liability as a business owner/operator?  You guessed it – a properly structured corporate entity.  This is where a holdco comes into play.  Imagine one business owner running a car wash plus several rental properties.  Those ventures have different customer acquisition strategies, earning potentials, and risks.  Even so, the owner wants them both for diversification and smoothing out cash flow.

It makes no sense for this owner to have both operations within the same business.  They have distinct functions, markets, capital allocations, and so on.  So, why risk the car wash if there is a slip and fall on the sidewalk at a rental?  See where we’re going with this?  It also creates a problem if the owner wants to sell one of the two.

Say someone wants to buy the car wash.  Separating it from the assets of the rental properties will create an allocation nightmare.  The acquisition time allocation is much more straightforward if they are each their own entity.  That will help you avoid the top deal killer – time.

So, as you, the serial entrepreneur explores expansion through acquisition, remember the holdco structure and its many benefits.  It can add asset and liability protection, decrease time spent closing deals, and provide natural exit strategies.

*Disclaimer: this article is for informational purposes only. It is not providing legal advice. It does not create an attorney-client relationship.