Todd NesnickCreating a holding company brings several significant advantages. This method of capital concentration allows avoiding many formalities, diversifying capital, and protecting profits from risks and creditors.
The advantages of holding corporations can be divided into two groups. The first group of advantages relates to the advantages of integration in general, regardless of the form of integration; a holding, a financial group, or a simple partnership. Clearly, the business activities of an autonomous, unincorporated structure are often less profitable in comparison to an integrated structure.
The second group of advantages relates to holdings in particular, to the specifics of this business structure.
When business entities unite under a holding, an effect of a ‘synergetic system’ appears. When several companies join their efforts, they do not simply add benefits together but rather they multiply them.
Main advantages of holding corporations
In comparison to non-integrated commercial organizations, holding corporations boast the following main advantages:
– Opportunities to conduct large-scale business operations. This concerns production facilities, investment funds, and labor force. Besides, holdings can involve skilled administrators, scientists, and engineers in their operations.
– Minimization of competition. Subsidiaries of a holding company do not usually compete with each other in the same markets, which can be highly beneficial.
– Opportunities to put out competitive products (services) by creating a self-sufficient vertically integrated system (from mining raw materials to putting out high value added products, for example).
– Capital centralization. Depending on the given economic conditions, the capital can easily ‘flow’ from one area of operations to another.
– Opportunities for industrial diversification. This can help reduce business risks and let each subsidiary focus on certain tasks.
– Opportunities for consolidating the production, the technical expertise, and the R&D.
– Opportunities for implementing coordinated financial, investment, and credit policies.
– An image of a large and influential integrated business structure.
– Opportunities for lobbying the holding company’s interests in the national Parliament and Government.
In addition, there are other holding company benefits that make this business structure highly efficient and profitable.
Stability of holding corporations
A holding corporation is essentially stable: the subsidiary companies belong to the holding and the holding administration controls the subsidiaries. You cannot ‘exit’ a holding in the way you can exit a cartel agreement, for example. If the circumstances change, the holding administration adapts to the new reality and makes decisions that the subsidiary companies have to obey. In this way, the integrity of the association is ensured.
The subsidiary companies remain separate corporate entities and they engage in business operations on their own behalf. They are liable only by the assets that belong to them, not to the holding (some exceptions may apply, however).
For this reason, high-risk operations can be delegated to subsidiaries. Risk hedging strategies also include placement of the main liquid assets of the holding in specially designated structures. Dispersal of valuable assets among several corporate entities reduces fiscal risks and increases the stability of the business as a whole.
Subsidiary leasing companies
Often holdings have subsidiary leasing companies that hold real property and other valuable assets that they lease to other subsidiaries within the holding. In addition to reducing the risk of losing the property, this method gives access to some tax benefits that are available to leasing companies in many countries.
Mobility and flexibility of holding companies
In addition to stability, holdings are characterized by high flexibility and mobility. A holding corporation gives enough freedom to the subsidiaries as far as their forms of ownership are concerned. Depending on the functional role of each subsidiary, it can be more or less autonomous in the decision making process.
Holdings’ mobility is also related to the procedures of creating and restructuring a holding company. It is well known that creating a holding does not involve registration procedures. Acquisition of a controlling stake is always administratively and financially preferable to purchasing material assets. The flexibility of the legal structure of a holding company allows diversifying and growing the business very fast.
Besides, the holding administration can easily sell the controlling stake in a subsidiary company if it becomes inefficient. Companies purchased by holdings preserve their company names, their trademarks, and their commercial images. This may be especially important if the subsidiary is well known in a foreign market, for example. If the holding company is only entering this market, the well known brand name can help greatly.
Distribution of commercial risks
Holdings ensure distribution of commercial risks. This is especially true for diversified holding corporations whose subsidiaries work in different sectors of economy and in different markets. This sort of diversification allows earning stable profits by directing capital to the most profitable spheres of business activities. A holding company can also finance a subsidiary that is starting to manufacture a new promising product or that is entering a new market. Corporate entities forming the holding can act as consumers of their colleagues’ products too. This can contribute to the growth of the products’ popularity and allow returning the investments within a shorter period.
Centralization of various functions in a holding company
A number of functions can be centralized in a holding company, which can reduce the overall administrative costs significantly. As a rule, the holding administration deals with such tasks as planning, organization of financial flows, centralized accounting, legal support, personnel policy, information support, statistics, marketing, and sales strategies. Subsidiary companies are thus freed from the task of thinking strategically and they can concentrate on performing their profit-generating activities.
Skilled business managers in holding administrations working in the areas specified above usually interact with all subsidiary company directors or at least with several of them. In this way, they work for several companies at a time instead of working for only one company. This fact makes their high salaries justified and their services appreciated.
Money can also be saved on large wholesale purchases of raw materials and supplies for several subsidiary companies simultaneously. When no functions are duplicated and the resources are distributed in an economical way, the overall operational costs also become lower. A holding company collects technological, administrative, and investment opportunities in one place. At the same time, several corporate entities have access to these opportunities. A holding company can reduce the operational costs of any investment project.