How to Start a Holding Company? A Comprehensive Guide

Recently we have been seeing a significant increase in the number of clients that own a holding company with multiple business units, or would like to build a holding company and have come to us for help building a pro forma financial model that will consolidate the individual businesses into one set of financial projections for the holding company as a whole.  Since we have been seeing this trend lately, I wanted to dig in to learn as much as I could about holding companies, the different use cases, types and models.  While I am doing research I always enjoy writing down what I learn in an effort to give others a shortcut in learning.  

The research time also informs how we build our financial models to try to meet the needs of different use cases.  You can check out our Holding Company Financial Model here. 

So with that in mind, I am going to do a deep dive on holding companies and plan to cover the following topics:

What is a Holding Company? 

• Holdco vs. Holding Company
• Platform Company
• Parent Company

Why Start a Holding Company?

• Holding Company Liability Protection 
• Holding Co Tax Efficiency
• Holding Company Operational Efficiency 
• Access to Capital for Holding Companies
• Shared Resources and Expertise
• Holding Company Board Governance
• Holding Company Exit Strategy 

Typical Holding Company Structures

• Corporation
• Limited Liability Company (LLC)
• Partnership:
• Trust
• Offshore holding company
• How to setup a holding company

Acquisition of Holdco Subsidiaries

• Acquisition strategies
• Multi Unit Businesses
• Roll Up Acquisitions
• Franchises
• Vertical Integration
• Horizontal Integration
• How to find businesses to buy
• Loan funding for acquisitions
• Holding Company Business Plan
• Equity funding for acquisitions
• Seller Financing
• Due diligence for buying businesses

Holding Company Financial Modeling

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With that as a roadmap, let’s dig in!

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What is a Holding Company? 

A holding company is a unique type of business structure that allows investors and entrepreneurs to diversify their investments, minimize liability, and optimize operational efficiencies.  

Defining Common Holding Company Terms

There are a number of terms that all mean the same or similar things when it comes to holding companies.  Here are a few you should know: 

Holdco vs. Holding Company

Holdco is simply an abbreviation of the term "holding company." There is no difference between the two, and they can be used interchangeably.

Platform Company

A platform company is a company that serves as the foundation for a holding company to make strategic acquisitions in a specific industry, aiming to create a dominant position or achieve economies of scale.  Typically, the platform company is the first company that you might acquire or build when implementing a roll up acquisition strategy. 

Parent Company

A parent company is a business entity that owns and controls one or more subsidiary companies. In the context of a holding company, the parent company is the holding company itself.

With some of that terminology out of the way, let’s talk about why you might want to start a holding company. 

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Why Start a Holding Company?

Starting a holding company can offer several advantages to business owners and investors. Here are some good reasons to consider creating a holding company:

Holding Company Liability Protection 

Holding companies can help protect the assets of the parent company and its subsidiaries by isolating liabilities. If one subsidiary faces legal or financial trouble, the holding company structure can prevent these issues from impacting other subsidiaries or the parent company.

Holding Co Tax Efficiency

A holding company can provide tax benefits through the consolidation of taxable income and losses across subsidiaries, which can lead to a lower overall tax liability. Additionally, holding companies may benefit from tax incentives and favorable tax treatment in certain jurisdictions.  

If the holding company owns 100% of the subsidiaries, the subsidiaries may be treated as disregarded entities for tax purposes.  This means you can file a single consolidated tax return according to Little John Law. 

Holding Company Operational Efficiency 

A holding company can consolidate administrative functions, such as accounting, HR, and legal services, across its subsidiaries. This allows for cost savings, streamlined processes, and improved resource allocation.  This can also help you compete for talent.  Imagine if you owned four separate companies that could each budget $100,000 per year for a CFO.  If each entity was looking to hire a separate CFO it could be difficult to find quality talent for $100,000 per year, but if the four companies were part of a holding company and the holding company hired one CFO to handle the CFO function for each of the four entities now you could hire a very talented, $300,000 per year CFO and still have $100,000 left over between the four entities.  

Access to Capital for Holding Companies

Holding companies can have easier access to capital due to their diversified assets and reduced risk profile. This enables them to raise funds for investments, acquisitions, or other growth initiatives more readily.

A concrete example could be that the holding company secures a line of credit that can be drawn upon by any of the subsidiaries as needed.  Due to the size and diversification, the bank may offer a lower interest rate and more favorable terms than if each individual subsidiary tried to establish their own independent line of credit. 

Shared Resources and Expertise

A holding company can pool resources, such as intellectual property, technology, and industry expertise, across its subsidiaries, fostering innovation and operational improvements.

For example, if one subsidiary identifies a unique way to run Facebook ads that provides a strong ROI, they can train the other subsidiaries to implement a similar strategy in their market. 

Holding Company Board Governance

Most small businesses probably don’t have a board of directors or advisory board.  With a holding company structure you might be able to recruit talented board members and advisors to support the holding company as a whole thereby allowing each of the subsidiaries to benefit from that board structure and advice. 

Additionally, a holding company can establish a centralized management structure, improving oversight, strategic planning, and decision-making across its subsidiaries.

Holding Company Exit Strategy 

A holding company can provide an effective exit strategy for business owners, allowing them to sell individual subsidiaries or the entire holding company, depending on their objectives.  

This can be a real advantage.  Let’s say you have a business that manufactures equipment and you have another business that installs and services the equipment.  Although you could combine the functions into one business entity that manufactures, installs and services or repairs equipment, when it comes time to sell the business, your list of potential buyers that want to purchase the combined business is likely to be much smaller than the list of potential buyers that would be interested in acquiring the manufacturing or the services business only.  Having these entities separate from the start can give you more options when it comes time to exit. 

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Typical Holding Company Structures

I am not going to dig too deep into this or advise you one way or the other because I am not an attorney!  I just wanted to mention that there are different types of company structures that can be used for a Holdco.  Some of the most common holding company structures are:

• Corporation
• Limited Liability Company (LLC)
• Partnership
• Trust
• Offshore holding company

How to Setup a Holding Company

Here's a step-by-step guide to set up a holding company:

1. Choose a Business Structure: Most holding companies are either LLCs (Limited Liability Companies) or corporations.  Each has its benefits depending on the purpose and size of the operations. Research the benefits and drawbacks of each in your jurisdiction.
2. Choose a Location: Research which jurisdiction (country or state) is most suitable for your purposes. Some locations offer more favorable tax conditions or legal protections for holding companies.
3. ‍Draft and File the Necessary Paperwork: For corporations, this usually means filing "Articles of Incorporation." For LLCs, it’s typically "Articles of Organization." Ensure you provide all necessary details, like business purpose, names and addresses of the initial directors or members, and other relevant information.
4. Obtain an EIN or Equivalent:  In the U.S., this is called an Employer Identification Number (EIN) and is obtained from the IRS. It's like a social security number for businesses.
5. Open a Business Bank Account: Using a separate bank account for your holding company is essential for keeping finances distinct and clear.
6. Develop a Strong Operating Agreement or Bylaws: For LLCs, this is an Operating Agreement, detailing how the company will function and be managed. For corporations, these are Bylaws.
7. Transfer Assets: If you have existing businesses or assets that you want the holding company to own, you'll need to transfer them. This can involve selling them to the holding company or contributing them as capital.  We can dive into the various options next.

How to Transfer Assets to a Holding Company

Once you have your holding company setup, there are various ways to transfer assets to your holding company. You should certainly consult with your attorney to determine which is best for your situation. Here are some common ways to transfer assets to a holdco.

Transferring assets to a holding company is a critical step in setting up the structure. There are several methods to do so, each with its own implications. Here are some common methods to transfer assets:

1. ‍Sale: The operating company sells its assets to the holding company. This can be done at fair market value.  A sale may trigger taxes if there's a gain on the assets being sold. It's crucial to have documentation supporting the sale, especially if the transaction involves related parties.
2. ‍Contribution in Exchange for Equity: The owner of the assets contributes them to the holding company in exchange for shares or membership interests in the holding company. This method can sometimes be structured to defer or avoid immediate tax consequences, especially if certain requirements are met.
3. Loan or Capital Lease: The operating company can lend assets to the holding company or enter into a lease agreement. This ensures that the holding company has the use of the assets while the operating company retains ownership. The holding company would then pay rent or loan payments to the operating company.
4. Drop Down: An operating company can "drop down" assets into a subsidiary holding company.  This can be done through a contribution, sale, or a combination of both.
5. Mergers and Reorganizations: More complex corporate reorganizations can be used to transfer assets to a holding company. These can often be structured in a way that defers tax implications. Examples include a tax-free merger or a type of reorganization under specific provisions (e.g., in the U.S., under Sections 368 or 351 of the Internal Revenue Code).
6. Gift:  For private holdings or family businesses, assets can sometimes be gifted to the holding company. However, this can have gift tax implications.
7. Trusts: In certain situations, especially for estate planning purposes, assets may be transferred into a trust, and the holding company might be the beneficiary or operate in conjunction with the trust.
8. Spin-off or Split-off: In more complex corporate structures, assets can be transferred to a holding company through a spin-off or split-off. This separates a part of the business from the parent company and transfers it to the holding company.
9. Asset for Asset Exchange: The holding company can trade other assets of equal value with the operating company.

When considering transferring assets to a holding company, it's essential to be aware of the potential tax consequences, liability concerns, and other implications. This is especially true when transferring assets between related entities, as authorities often scrutinize such transfers to ensure they are done at arm's length and are not merely attempts to evade taxes or defraud creditors.

Always consult with legal and tax professionals before making decisions about transferring assets to a holding company. They can provide guidance tailored to your specific situation and jurisdiction.

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Acquisition of Subsidiaries

Now I want to get into the different strategies and mechanics of growing or acquiring businesses within a holding company structure.  

Acquisition Strategies

There are a number of reasons why you might have a holding company structure and a number of strategies or types of businesses that the holdco might hold.  I am going to run through some of the most common use cases. 

1. Multi Unit Businesses

One common use case for a holding company could be that you started a business in one location and you decided to open a second location of the same type of business.  Maybe you opened a coffee shop on the south side of the city and you want to open a second location on the north side of the city.  When opening the second location it may make sense to open a holding company that would own 100% of the first business entity and then set up a separate entity for the second location to be wholly owned by the holding company as well.  

Using a separate entity + Holdco structure for multiple location businesses makes a lot of sense.  You can more easily see the performance of each unit and you can more easily sell one unit without selling all the units.  

2. Roll Up Acquisitions

Roll up acquisitions are growing in popularity, especially for private equity firms.  The idea is to roll up a number of similar businesses and benefit from shared resources, operational efficiency and access to capital, etc.  For example, you might buy a laundromat as an initial platform company, optimize and perfect your operating model, and then raise capital to go out and acquire many more laundromats across a geographic area. 

3. Franchises

There are many franchise concepts where a single unit will not generate enough income for the owner to make a living, but these types of concepts can lend themselves to a holding company structure where an individual owner opens or acquires many units of a franchise concept. 

4. Vertical Integration

Vertical integration is another business strategy in which a holding company structure can be used.  To implement a vertical integration strategy a company will expand its operations by acquiring or controlling other companies involved in different stages of the same production or distribution process. This strategy involves either acquiring or merging with companies that operate upstream or downstream in the value chain.

5. Upstream Integration

Upstream integration involves acquiring or controlling suppliers or companies that produce raw materials, components or intermediate products, which the acquiring company uses in its production process. This allows the company to have more control over the quality, price, and availability of inputs, reducing supply chain risks and costs.

6. Downstream Integration

Downstream integration, on the other hand, involves acquiring or controlling distributors or retailers who sell the company's products to end-users. This strategy enables the company to have greater control over the marketing, distribution, and pricing of its products and services, which can increase efficiency and profitability.

Vertical integration can be beneficial for companies because it can reduce transaction costs, improve coordination and communication within the supply chain, and create efficiencies in production and distribution. 

7. Horizontal Integration

Horizontal integration is a business strategy in which a company expands its operations by acquiring or merging with other companies that operate in the same industry and at the same stage of the value chain. This means that the companies acquired or merged with are typically competitors or companies with similar products or services.

The purpose of horizontal integration is to achieve economies of scale, increase market share, and gain more control over the market. By consolidating the market, the acquiring company can reduce competition, increase its bargaining power with suppliers and customers, and improve profitability

Horizontal integration can take different forms, such as mergers, acquisitions, joint ventures, or strategic alliances. The success of horizontal integration depends on several factors, such as the degree of market concentration, the level of competition, the cultural fit between the companies, and the ability to manage the integration process.

Now that we have outlined 5 of the most common ways that a holding company can be used, let’s talk about about identifying, financing, and closing a purchase of a business. 

How to Find Businesses to Buy

Depending on your business strategy there are a few ways to identify businesses to acquire:

1. Hire a Business Broker - Much like hiring a real estate agent when trying to buy a house, you can hire a business broker who can take your wishlist and help you identify businesses that meet your requirements that may be available for sale.  Sunbelt Business Brokers is one of the larger business broker networks in the US, of course you can do your own Google research to find a business broker near you. 
2. Browse Business Listing Websites - There are many websites that list businesses for sale where you can directly browse and sort by industry, size, location, etc. BizBuySell is one of the largest business directories or businesses listed for sale. 
3. Cold Outreach - You might want to acquire a business that isn’t listed for sale, maybe you want to acquire a competitor or a business that is within your supply chain.  These strategic acquisitions will likely take a cold outreach from you to the current owner. 

Once you have identified a business that you would like to purchase you will need to identify how you plan to finance the acquisition.  Financing an acquisition is often done with a mix of debt and equity.  Let’s look at your options in more detail. 

Loan Funding for Acquisitions

If you are looking to acquire a small business and need $5 million or less in loan funding, the SBA offers a competitive loan product.  There are banks that specialize in SBA lending for acquisitions specifically.  I typically suggest that you Google “Top SBA Lenders in ______” and fill in your state.  You will probably find a list of the banks that made the most SBA loans in your state over the last 12 months.  This is a great place to start. 

Learn more about How to Finance an Acquisition. 

Your lender may ask you for a business plan for your holding company, especially if you are looking for an SBA loan, but what exactly should you include in a HoldCo business plan? 

Holding Company Business Plan

A holding company business plan is going to be unique in the sense that you may have a business plan for the holding company as a whole, but you are also likely to have a business plan for each business that is held by the parent company. If your lender asks you for a business plan for your holding company I would suggest the following outline:

Executive Summary:

• Company Description: Brief overview of the holding company.
• Mission and Vision: Define the long-term goals and the company's reason for existence.
• Objectives: Short-term goals and targets.

Company Structure:

• Legal Structure: Details on whether the holding company is an LLC, corporation, or another structure.
• Ownership Information: Who are the principal owners and their percentage of ownership.

Business Model:

• Business Activities: Unlike other business models, holding companies own assets or shares in other companies. Define the types of businesses or assets the holding company plans to acquire or invest in.
• Revenue Model: How the holding company expects to generate revenue (dividends, asset appreciation, royalties, rents, etc.)

Market Analysis:

• Target Industries: Which sectors or industries does the holding company intend to invest in?
• Market Trends: Current and projected trends in those industries.
• SWOT Analysis: Strengths, Weaknesses, Opportunities, and Threats related to the holding company and its investments.

Investment Strategy:

• Acquisition Criteria: Guidelines for acquiring new assets or companies (size, industry, profitability, etc.).
• Management Approach: Whether the holding company will be actively involved in the management of its subsidiaries or be a passive investor.
• Exit Strategy: Under what circumstances will the holding company divest from its investments?

Asset Management:

• Monitoring and Reporting: How will the holding company monitor the performance of its assets?
• Risk Management: Strategies to manage risks associated with each investment.
• Diversification Strategy: How will the holding company diversify its investments to protect against industry-specific risks?

Financial Projections:

• Projected Income Statement: Expected revenues (like dividends or interest income) and expenses.
• Balance Sheet Forecast: Expected assets, liabilities, and owner's equity over time.
• Cash Flow Statement: Expected inflows and outflows of cash.
• ROI Projections: Return on investment expectations for the assets/companies under the holding company.

Operational Plan:

• Location: Where the holding company is based and reasons for that specific location (e.g., tax advantages).
• Human Resources: Any staff required to manage the holding company's operations and their roles.

Exit Strategy:

• How and when the primary stakeholders plan to sell or otherwise exit their ownership in the holding company, and potential scenarios or conditions prompting this.

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Equity Funding for Acquisitions

It is unlikely that you will acquire a business with 100% financing which means you will need to invest some equity into the deal.  This could come from your personally, from savings at the Holding Company, or you could look for investors.  

You could start a search fund which is a unique way to bring on investors to help you acquire a larger business than you might be able to acquire on your own.  

Seller Financing

Lastly, you can negotiate with the seller such that the seller would provide some of the financing for the acquisition through a seller’s note.  For example, you might agree to buy a business for $1,000,000.  You could borrow $800,000 through an SBA loan, invest $100,000 of your own capital, and finance the remaining $100,000 with a seller’s note.  

Learn more about how to use seller’s notes with SBA. 

Due Diligence for Buying Businesses

Once you have the financing lined up and agree on basic deal terms, you will need to complete due diligence.  Think of this like the inspection when you are buying a house.  Just like you want to have an inspector check to make sure your house is on a strong foundation, doesn’t have a termite problem, and doesn’t need a major repair any day, you will want to have a due diligence expert conduct due diligence on your acquisition target.  This might seem frustrating and a delay to you and the seller, but it is important.  DueDilio is a marketplace of experts that can help you complete due diligence items like a Quality of Earnings report. 

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Holding Company Financial Modeling

Since the purpose of acquiring or starting multiple companies that are consolidated in a holding company is often due to the financial benefits of the holdco structure, you are likely going to want to build a financial model for your holding company.  We have built two financial model templates that can help you with different aspects of your holding company.  

1. Acquisition Pro Forma Template
2. Holding Company Pro Forma Template

Our acquisition template will help you model the specific details of each acquisition, you will want to use a separate copy of the template for each unit that you acquire. 

But once you acquire multiple units you will want to build a pro forma that allows you to add projections for each business unit within the holding company and then see the consolidated financial statements for the holding company.  Our HoldCo projection template will help you do just that!  

As you get into the thick of it, if you ever need help customizing a model for your specific situation, we offer custom financial modeling services as well.