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A parent company is a company that has controlling interests in one or more smaller companies. The parent company only needs to own a majority to have control. Examples range from owning 100% of the subsidiary company to owning the minimum majority of 51%.
How hands-on a parent company might be will be determined by each individual situation. Some parent companies will appoint a subsidiary manager to simply monitor and report on a subsidiary company, while others will appoint a senior manager to control operations more actively.
The control aspect is the main difference between a parent company and a holding company, but let’s look closely at the differences between the two.
What Is the difference between a Parent & a Holding company
A holding company owns the shares or stock of other companies, but does not get involved with the daily operations of each subsidiary. The holding company usually will have nothing to do with the production of goods or provision of services, but the exact dynamic can vary greatly from instance to instance. One common example is when a holding company is used to manage either the legal liabilities and/or tax obligations of other firms.
Another example is when a holding company splits the original company into multiple related groups to reduce the amount of liability for certain risks. This way the liabilities fall only upon the smaller individual companies responsible for that part of the business.
For example, a company owns and operates an amusement park, but splits the assets into smaller groups owned by a holding company. One of the smaller groups now owns the rides and equipment, another supplies the food and drink available in the park, and another owns the land where the amusement park is situated. This arrangement prevents the entire company being liable for damages if someone should be injured on a ride, or someone else gets food poisoning from the refreshments.
Parent companies cannot avoid liability like this as they have active control of their subsidiaries, even if they are not hands-on and allow the subsidiary to manage its own operations. It is a very important difference for small businesses and startups that might be looking for a parent or holding company to buy into them.
How to Become a Parent Company
Becoming a parent company doesn’t mean a business must become huge beforehand, although parent companies usually are on the larger side. There are two main ways that companies can become parent companies:
Acquisitions of other smaller companies
Spin-offs from their own company
Spinoffs are possible to achieve even for small to medium-sized businesses with the necessary means.
The acquisition method involves a company buying a majority of shares in a smaller company to obtain a controlling share. The reasons for doing so range widely and include the parent company wanting to branch out in a new direction the smaller company has expertise in. A parent company might also buy out a smaller rival to reduce competition, or to acquire the talents and resources of the smaller firm.
A recent famous example is Facebook’s acquisition of Instagram for $1 billion in 2012. At the time, Instagram had only 13 official employees, but has since contributed over $20 billion to Facebook’s annual revenue. It was a mutually beneficial acquisition, as Facebook did not introduce drastic changes and kept the original founders and CEO in place to continue running the social media platform their way.
Instagram has benefited massively from the additional reach that Facebook provided, and has since attracted over one billion monthly users and 500 million daily users. Both companies also share talent and resources to help each other keep improving and dominating the social media scene.
A business can also become a parent company by “spinning off a part of its own operations by turning them into a subsidiary. There are several reasons to become a parent company via spinoff, with one being the spinning off of a less productive part of the business in order to focus on another part of the business with better growth prospects.
Alternatively, a company may spin off a part of its operations to increase its value as an independent operation, with the ultimate intention of selling the subsidiary for a healthy profit while relieving the parent company of their burden to it.
Another reason to spin off a part of a company’s operations and turn them into a subsidiary company is because the parent company wants to move in a different direction. The subsidiary might have very different managerial or strategic priorities that do not fit in with the direction of the parent company, so they become separate companies with the subsidiary owned by the parent company.
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