There are several ways to create a holding company:
1) Set up a holding company and provide it with enough funds to create or acquire subsidiaries.
2) Buy a company that has already been created but hasn’t conducted any activities to benefit from its immediate use. This is often the case with mixed holding companies aimed at trading operations. The seller is to provide a “certificate of good standing” as a proof of the company’s quality.
3) Create a holding company through transfer of shares of subsidiaries previously held by individual shareholders. This form of creating a holding company consists of replacing individual shareholders of operating companies by a corporate shareholder, the holding company.
The holding company owns the shares of the operating companies instead of individuals, previous shareholders, who are now shareholders of the holding company. It’s necessary to accurately assess not only the advantages but also the limitations of this operation. It’s necessary to plan how to transfer the shares of the subsidiaries to the holding company at the lowest fiscal cost and with the possibility of eventual profit while preparing for the possible transmission.
Whether the operation companies exist or not prior to the formation of the holding company helps define the role of each company within the group. The holding company can provide support for the entire group (HR, IT, marketing, accounting, etc.). These resources can be centralised and shared within the holding company.
A holding company has a higher bargaining power when it comes to banks. It’s the holding company which is responsible for the negotiation in favour of subsidiaries. With its financial strength, the group must be able to obtain financing costs below those paid by the subsidiaries individually negotiating their loans. A holding company may also provide guarantees to subsidiaries instead of shareholders. Also, a holding company helps these new shareholders to avoid entering at the level of each company, thus saving legal costs and the lawyers’ fees in addition to a greater bargaining power in case of sale of a subsidiary.
A holding company provides benefits when it comes to the acquisition of a company through debt. The holding company has a borrowing power based on the strength of its group.
In addition, the revenues, mainly from the dividends coming from a subsidiary, and the expenses (mostly the financial charges) are confined to the holding company, which offers some transparency because it must prepare annual accounts once a year.
When supporting the loan by the holding company, a shareholder protects their heritage. In case of bankruptcy, the bank, except when the shareholder himself has acted as guarantor, can’t force the shareholder to repay the loan, since the liability of shareholders is limited to their contributions.
Fiscally: setting up a holding company reduces taxes and increases the free-cash-flow and consequently the investment capacity of the group. The holding company can opt for tax integration, that is to say, for the consolidation of profits and tax losses recorded by the parent company and all subsidiaries controlled at more than 95% by the latter.