Holding Companies

I run a holding company - of a sort. It's called "Management Analytics" (manalyt.com). I use it for a few different things:

I don't have the holding company own portions of operating companies. The reasons are complicated, but this is potentially a flaw in the way I operate, and one I will not likely fix any time soon.

Holding companies and operating companies

In a lot of cases, there are advantages to creating a holding company and operating companies. The basic idea is simple. The holding company has intellectual property, special capabilities, common services, connections to partners, etc. The operating companies operate in their territories independently of each other, but tied to the holding company.

Structural decisions

The division into holding and operating companies have different reasons, commonalities, differences, legal restrictions, tax implications, and so forth. Thus the reasons for and nature of structure depends on the specifics of the entities involved and their reasons and tradeoffs. Here are several examples I have seen recently:

There are many other such approaches, but this can give you a sense of the many ways this structure can be applied.

There is a catch... or two

There are three substantial problems with this approach that I have experienced first hand; (1) diffusion of resources and effort, (2) the overhead of it all, and (3) keeping arms length..

How's that working out for you?

I have created about one new operating company per year for the last 25 years or so. On the average, I have closed almost as many. Each one broke even or better, because I don't create them as separate entities until they are able to do so - I run prototypes of them under my holding company first. 25 started, 3 still running with a profit - that's 12% "still undetermined", 88% returning greater than 1x. Several have returned 20x or better, but the investments have not been that large. An average perhaps $15K-$25K/ea. Most of these exits are essentially buy-backs and shut downs. So adding up the numbers, $20K average * 25 companies = $500K of investment in operating companies. Total returns have averaged something like $100K/y - or 5x returns - typically after 3-5 years, and excluding "pay" for time spent.

A critical thing to understand in this regard is that you don't have to have any huge wins in order to do reasonably well under this strategy. Many small startups with reasonable successes in small niches that last a few years can bring overall success for you and your partners in each of them as well as satisfied customers well served. Investments can be quite small and thus low risk with reasonable rewards. Singles and doubles are good enough.

I also ended up with "Management Analytics" (an operating company) buying "Fred Cohen & Associates" (the holding company) some years after "Fred Cohen & Associates" (an operating company) bought "Management Analytics" (an earlier version of the holding company). The details are for another article, but let us just say that learning how to do this properly and not making certain types of mistakes is a really good idea.

Not exactly suffering

Having said all this, I should note that I keep planning to operate lifestyle businesses, and some of them keep ending up in the venture space. Angel to Exit is a great example of this:

So much for my latest lifestyle business plan! Thank goodness I formed it as an operating company rather than making part of my holding company and later having to disentangle it. Now I can grow it independently, bring in management folks, staff it, and so forth, as an independent entity. I can give equity in exchange for effort, license the technolgy and support services from my holding company, take draws and fees from it as it grows, get involved in my advisory boards if and as I want to, and still live the lifestyle I was going for. But only after I try to grow it furiously for the next year or so...

And what if it fails to gain this much traction? No worries! The operating company can still operate as a lifestyle business if the channels don't work out. Or it can go out of business, or I can bring it back in by buying out investors and/or partners from the growth process.

In summary

Holding companies and operating companies are not for every situation or every entrepreneur. But there are situations where they apply. The trick is to figure out which, if any, apply to your situation. The basics are laid out here, but the decisions are rarely clear. As usual, it all depends.

Copyright(c) Fred Cohen, 2017 - All Rights Reserved