What is a holding company and what does it do?

What does a holding company actually do?

A holding company does not make the product or serve the customer. Its subsidiaries do. The parent does five things:

1. Owns. It holds the shares or membership interests of each operating company.
2. Allocates capital. It decides which business keeps its cash, which sends cash up, and what gets bought next.
3. Picks leaders. It hires, pays and, when needed, replaces the people who run each company.
4. Raises money. Investors and lenders can fund the parent once instead of funding each business separately.
5. Buys businesses. Acquisitions land under the parent as new subsidiaries or are folded into an existing one.

On this site we group that work into four levers: Capital, Talent, Opportunities and Acquisitions. A holding company that pulls all four is a platform. One that only owns shares is a filing cabinet.

What is the difference between a pure and an operating holding company?

• Pure holding company. The parent owns subsidiaries and nothing else. It has no customers and few or no employees. Each business sits in its own entity below it. This is the cleanest structure for separating liabilities and for showing investors what they own.
• Operating holding company. The parent runs a business itself and also owns other companies. This often happens by accident: your first company buys a second one, and the original business becomes the parent. It is simpler at the start. The cost is that the original business's liabilities sit at the top of the group.

Many acquirers start as an operating holding company and later move to a pure one when they add investors or a third business. Moving an existing business under a new parent needs lender consent and tax review, so it is easier to decide early.

Why do acquirers use a holding company?

• Liability separation. A claim against one subsidiary generally stays in that subsidiary, if you keep the companies genuinely separate.
• One place for investors. Investors who want to back a series of acquisitions can own a share of the whole group instead of a separate deal each time.
• Value from size. The same profit is often valued at a higher multiple inside a larger, better-run company.
• Flexibility. You can sell, recapitalize or spin out one company without touching the others.
• A path to listing. A public company is normally one parent that owns its businesses. If listing is ever on the table, the holding company is the shape to grow into.

The value argument is the one that matters most. Here is the illustrative version used on this site, with the arithmetic shown:

1. Buy a business that earns $1,000,000 a year at 4x: $1,000,000 x 4 = $4,000,000, paid with debt, seller notes and equity.
2. Inside a platform valued at 10x, that profit supports $1,000,000 x 10 = $10,000,000 of value.
3. The difference, $6,000,000, exists before any growth.

Real multiples vary. GF Data's medians of 4.5x and 6.5x by size band are a more conservative guide than 4x and 10x. Overpaying or failing to integrate destroys the gap.

How is a holding company different from a fund or a search fund?

• A private equity fund raises money for a set period and is built to sell its companies and return the cash. A holding company is usually built to keep them.
• A search fund raises money to find and run one company. Some searchers later turn that company into a platform, but the model starts with a single business.
• An independent sponsor raises capital deal by deal and is paid fees and carried interest on each one.
• A holding company owns several businesses permanently, and its owners are paid through dividends, buybacks, refinancing or, for a few, a public listing.

Can a holding company be public?

Yes. Tiny, a well-known small holding company, chose to list on the TSX Venture Exchange through a reverse takeover. Listing is not a safe default, though. MBH Corporation, a UK holding company of about 19 businesses, delisted from AQSE in January 2024 and entered administration a month later.

My view is that going public is realistic only for a holding company with real earnings or a clear path to them, books an auditor can work with and an acquisition program. Most should stay private.

Where these numbers come from: GF Data medians via Carry and Conquer; the MBH Corporation collapse from TheBusinessDesk. The 4x and 10x figures are illustrative, as stated on this site, not market data.

Related questions

Is a holding company a type of LLC?

No. "Holding company" describes a role, not a legal form. The parent can be an LLC or a corporation, and the choice affects taxes, investors and a future listing. Confirm the choice with a lawyer and a CPA.

Do I need a holding company to own one business?

No. One business can be owned directly. The holding company earns its cost when you plan a second acquisition or want outside investors.

Does a holding company protect me from personal guarantees?

No. It separates one company's liabilities from another's. A personal guarantee you signed for a loan stays with you.

How does a holding company make money?

Its subsidiaries send cash up as dividends or distributions, or pay fees for shared services under intercompany agreements. The parent uses that cash to pay its owners, service debt or buy the next business.

What comes next

A holding company is not free, and it is not right for everyone. Weigh both sides next: What are the pros and cons of a holding company?

Related articles

• What are the pros and cons of a holding company?
• How do you set up a holding company for multiple LLCs?
• Should a holding company be an LLC or a C-corp?
• ETA, search fund, independent sponsor or holding company: what's the difference?
• How do you build a holding company for acquisitions?

• What is a serial acquirer, and how is it different from a roll-up?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.