I'm sure you're familiar with Pepsi, the drink. But did you know that their beverage is only the tip of the product and services pyramid that they offer the public?
I read an article one day and was surprised to see that the following companies were owned by Pepsi, Diet Pepsi, Mountain Dew, Lay's, Gatorade, Tropicana, 7 Up, Doritos, Brisk, Quaker Foods, Cheetos, Mirinda, Ruffles, Aquafina, Naked, Kevita, Propel, Sobe, H2oh, Sabra, Starbucks (ready to Drink Beverages), Pepsi Max, Tostitos, Mist Twst, Fritos, and Walkers.
Same thing goes with Disney. When you hear the Company's name, you think cartoons and theme parks. But their operations spans so much more. Their wikipedia entry lists the following:
The Walt Disney Studios, Disney Music Group, Disney Theatrical Group, Disney-ABC Television Group, Radio Disney, ESPN Inc., Disney Interactive, Disney Consumer Products, Disney India Ltd., The Muppets Studio, Pixar, Marvel Entertainment, Marvel Studios, UTV Software Communications, Lucasfilm, and Disney Digital Network. The company's resorts and diversified related holdings include Walt Disney Parks and Resorts, Walt Disney World, Disneyland Resort, Tokyo Disney Resort, Disneyland Paris, Hong Kong Disneyland Resort, Shanghai Disney Resort, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney.
These 2 companies exhibit the next advantage when you leverage the power of using corporations to conduct business: replication. You get to control other businesses and maintain the ownership structure across the board. Let me explain.
How normal people handle multiple businesses
Supposing you have 5 partners with you. You get started on a business and it becomes successful. Cash flow is strong, the business is humming along perfectly, so you decide to expand and buy another business.
Normally, you would be giving money to the new business to maintain the proportion of ownership. You'd invite them by saying, "Ok guys, we had 20% each in the other company. Let's all put another 20% each for this venture."
Now, imagine that this business again becomes successful. The partners now go out and find another and another and another business to acquire. Pretty soon, they have a business empire in their hands. Let's imagine that they now own 10 businesses and they each have a 20% stake in each.
Where does Replication help?
Here's where it gets interesting. Imagine that one of the partners wants to take on a bigger role in the business. All of the other partners want to give him more of their shares to reflect the change in the sharing of responsibilities. Here's the capital structure for all companies:
All Partners - 20% with a total of 100% ownership.
Here's what they want to change it to:
4 partners will give 5% each to Partner 1 so he can own 40% and the others will each own 15%. Total is still 100%. Are you still with me? Here's a visual.
Sounds simple, right? You just take 5% and give it to the partner. Here's where it gets interesting. You have to issue board resolutions, surrender stock certificates, update the books, send out updates to the SEC for each of the businesses. Imagine how tedious this can be for every change that occurs. That's because each company is operating under an independent capital structure.
Let's use replication
Now, let's try a better way of managing business empires. Let's leverage the power of replication. Here, we will create a "mothership” company which will be the ultimate template. In orientations we conduct for clients, this is typically designated as a "Holding Company".
What's the job of this holding company? It is to hold the shares over other companies so you can control them from one convenient place. The other companies which the holding company would own are called "subsidiary companies”and their job is to carry on the business.
Here's a simplified version of how it would look:
Holding company composition - each of the 5 partners has a 20% stake for a total of 100%. This holding company is the control panel or the mothership. Whatever capital structure you want throughout the empire, you do it here.
Now, for each of the other 10 subsidiary companies, instead of the partners each holding onto their 20% share there, the holding company would be the majority stockholder for them. In the real world, the holding company can own 99% of the shares, while 1% can be owned by individuals who compose the board and corporate officers.
Let's examine what we have up to this point
Now, at this point, we have a holding company and the holding company owns a massive majority of the shares in each subsidiary. We now have leverage because if you want to make changes in ownership across the board, you only have to tweak the holding company's lineup. That ownership would then filter down throughout everything because the holding company owns everything anyway.
In our example earlier, if all the partners wanted to transfer 5% to Partner 1, all they had to do was transfer 5% of their holding company shares to him and viola, that change is reflected throughout the whole 10 companies. That's what I meant when I said that it replicates changes.
This is actually how the pros do it. If you hold substantial assets and you want to take a playbook from the big businesses, this is the way to do it. If you don't believe me, take a look at the Philippine Stock Exchange and see what holding companies are listed there. You'd be surprised to find that most of the products and services you avail of are controlled by holding companies.
What makes this a beautiful setup
So to recap, here are some advantages that you would experience when you manage a business empire thru a holding company:
Do it once, it replicates the ownership structure throughout. If you have to make changes to the owners, transfer ownership, adjust percentages, you just have to modify the holding company structure and that change is reflected throughout all the other subsidiary companies.
Helps you bring order to multiple operations. Since the ownership is centered around the holding company, it is very easy to manage the other companies because you hold the controlling vote thru the holding company.
Saves on admin expenses. Since you only have to implement one set of changes, you get to save on the time, effort and cost in implementing changes from within your business.
Preparing for scale. Since you already have the holding company in place, it is very easy to just keep replicating this way of doing business for all your successive expansions. You just have the holding company own the controlling stake in each venture, and they follow along just like the other companies before it.