What is an Investment Holding Company for Business funding

Investment Holding Company for Business funding

If you have heard about Hartmann Holdings, an investment company by Oskar Hartmann, one of the most successful companies, then most likely you understand at least a little what a holding is. Such companies are becoming an increasingly common activity in all industries and can be beneficial to individuals and from individual assets. Let’s take a closer look at what it is.

What is a holding company?

A holding company is a company that invests and/or buys shares in other, smaller companies, especially those that are just starting a business. They exist in almost every industry. Surprisingly, many well-known and popular brands are actually a subsidiary of the holding, and not an independent business unit.

The concept of “holding company” is quite broad. A company such as Berkshire Hathaway, which deals exclusively with investments in companies and industries, is a holding company. Parent companies such as Macy’s, Inc. (M), which boasts retail chain Macy’s and department store chain Bloomingdale’s among its subsidiaries, will also be considered holding companies as their sole purpose is to own large retail companies and maximize returns.

This is the peculiarity of investment holding companies. For the most part, their existence is to own other companies or their assets. The most successful and profitable of them will receive a controlling interest in most of these small companies, which will allow them to make important decisions in the business, as well as hire executives and managers for their subsidiaries. Although, as a rule, holding companies devote very little time to real transactions relating to their subsidiaries.

Holding companies do not have their own business. They may be required to do extra work if their assets constitute a controlling stake or 100% of the company’s shares of one of the companies. Whatever the investment, the task of the holding is to control it while the assets work on their own.

Such financial organizations have a CEO as well as a board of directors who help make decisions about managing current investments or companies, whether to invest in new ones and how to limit risk.

The main features of the holding are the following:

  • concentration of shares of companies from different industries and sectors of the economy, which may be located in different regions, in the hands of one parent company;
  • a multi-stage system of organization, that is, the presence of subsidiaries, which, in turn, can manage several more;
  • centralized management, which is carried out by the parent company by developing a global policy and coordinating the joint actions of all enterprises within the holding.

Advantages and disadvantages of a holding company

The biggest advantage of a holding company is protection against possible bankruptcy or excessive losses in the event of the bankruptcy of a subsidiary. In this case, they are not considered liable and creditors cannot harass the holding company in an attempt to obtain assets or part of them, they have an asset protection trust.

In addition, there are cases when such companies are allowed to sell goods and provide services if the owner of the holding so desires.

The holding also has the following advantages:

  • the parent company in it sets the general concept of development for all companies;
  • all companies in the holding conduct investment and financial activities in accordance with a single strategy;
  • the interaction of companies within the holding facilitates their entry into the international market;
  • the holding provides loans and financing to its companies on favorable terms. And also minimize taxes.

Setting up an investment holding company has its drawbacks. It can easily be used to exploit subsidiaries, as long as it has enough power to influence business decisions. Many holding companies are not completely transparent to their shareholders, which means that some shareholders may remain in the dark about many of the decisions that are made.

Holding company types

  • Property holding. In it, the parent company owns a controlling stake in subsidiaries.
  • Contract holding. The parent company does not own a controlling stake in subsidiaries, but exercises control under a business agreement concluded between them.
  • Pure holding. The parent company does not have any production, therefore, it is exclusively engaged in the control and management of subsidiaries by owning their controlling stakes.
  • Mixed holding. The parent company combines the production of products, the provision of services with the management of subsidiaries.
  • Integrated holding. The enterprises operate in a single production system.
  • Conglomerate holding. It unites enterprises from different niches, where each subsidiary is engaged in the production and distribution of goods independently of each other.
  • A personal holding company is a closed corporation organized to hold stocks, bonds, and other investment assets, including personal service contracts, and used to hold income for distribution at the most tax-friendly time for individual shareholders.”

Why create a holding?

The main reasons business owners consider starting a holding company are asset protection, tax incentives, and control or influence over other companies. Wholly owned holding companies can file the same tax return, saving time and money. The value of the holding company itself rises if the value of the shares it holds in various enterprises rises. By acquiring a certain level of capital in a business, a holding company can help dictate its direction and operations. In practice, holding companies are created to ensure the necessary volumes of production of competitive products, works or services and to maintain the stability of the functioning of significant groups of technologically related research, design and engineering and design organizations; consolidation of the results of economic activities of a group of organizations, ensuring the reduction of their total tax payments. This can be achieved through the mechanism of internal prices, which, unlike market prices, allow covering the losses of some divisions of the holding with the profits of its other subsidiaries.

Thus, we can conclude that the holding is a fairly profitable business entity. It has enough positive characteristics, but there are risks everywhere. If you want to learn more about holdings, then we advise you to study their most famous examples.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.