Yo, GirdleyWorld!
In this issue:
- My trip to Toronto
- 6 freedoms of the HoldCo structure (Or, “Why you should do a HoldCo?”)
- 3 Things to know about on the web
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Girdley goes to Toronto
I was in Toronto this week for the Collision conference (mostly a startup thing – but we used it as an excuse to get some of the team together somewhere less hot than Texas).
Some quick thoughts from the show:
- People don’t understand how much events like this are underwritten by governments trying to promote themselves. It felt like 1/3rd of the convention floor or more was just Canadian provinces pushing themselves.(Of course, much of the rest is companies paying to get on stage, etc.)
- God bless the hustlers. I saw people working their butt off at this show trying to make something out of nothing. Mad props to them.
- Conferences have the highest percentage of people doing things that look like work (but aren't doing anything) of anywhere on the planet. Sometimes I think we’d be better off if we outlawed these things. But if we did, what would I joke about? :-)
Here's some photos of governments throwing money around (click to expand):
I also pulled the most “Girdley” thing ever: I flew to another country – and forgot to bring pants. So I had to sheepishly do business dressed like this:
Alright, on to today’s topic!
6 freedoms of the HoldCo structure (Or, “Why should you do a HoldCo?”)
Okay, a very quick definition before we dive in:
A holding company is a structure whose primary mission is to own interests in other companies.
That’s it. No sales. No customers. None of the regular business operation functions. It holds assets, and coordinates between them.
Let’s look at what that unlocks for an entrepreneur.
1. Flexibility in capital allocation
Imagine you own a company that’s not growing quickly. The best you can get is a 10% return on investment.
But there’s a second business you can buy which gives you a 25% return on your annually invested capital.
The HoldCo structure lets you, the HoldCo CEO, deploy excess cash from one business that can’t deploy it well into another business where it can create better returns.
2. Parallel asymmetric bets
One particular advantage of a Holding Company is being able to make lots of asymmetric bets.
If you’re an owner-operator of one company, your fortunes rise and fall on a single bet. A benefit of a HoldCo is making multiple bets in parallel.
A second order benefit of parallel bets: When you’re not dependent on any specific venture succeeding, it’s easier to have a realistic perception of each of your business’s strengths and weaknesses.
3. Risk avoidance
Having multiple companies is a great way to put your eggs in lots of baskets, and end up with a more durable company.
Say one of your companies is extremely vulnerable to oil prices, and oil goes up. That company’s cash flow suffers.
But if you have another company immune to oil prices, you can absorb some of that shock across your wider organization.
A great way to avoid risk is to have some companies on both sides of the economy: some that are dependent on the economy, and some that do better during recessions (like liquor stores).
4. Tax savings
The interlocking of companies in your HoldCo can help to minimize your tax bill.
First off, there’s structure. C Corps, S Corps, and QSBS (in the USA) are all things that can be used by HoldCos, whether at the top level or all the way down as a subsidiary. This can help delay your tax bills.
Then there’s “active” vs “passive”:
In the US, active earnings are treated differently than passive earnings. If you’re earning from a regular job, or consulting, that’s considered “active”.
If you own a business and it loses $100,000 in a year due to depreciation or some other deductions, you can’t use that to offset your active income. But when you become a HoldCo and start to combine companies, it all becomes “passive”. That means you can use losses from one company to offset gains from another.
5. Economies of scale
Let’s say you have a portfolio of 5 companies. The bigger you are, the better things can get.
First, there’s the cross-pollination of ideas. You can get all your CEOs together for an annual retreat to share their learnings.
Then there’s concrete stuff, like cutting better deals with your suppliers. If all your companies buy paper, then you can get better discounts for ordering the basics in bulk.
If your companies are geographically centralized, you could combine headquarters or real estate. You can also scale services like hiring and training.
6. Efficiency through integration
Cooperation and knowledge sharing are a secret weapon of effective HoldCos.
For instance, if you build a HoldCo by buying small software, it doesn’t make sense to have a high-level leader at each company. But if they’re all under one accumulator HoldCo, you can appoint a strong leader at the highest level.
Your companies can also be customers of each other. If you have a cement factory and a construction company, the customer-client relationship can be win-win for both companies. The cement plant gets a durable customer and the construction company gets a stable supply of its raw material even when the competition is tough.
These are just some of the many advantages of the HoldCo structure.
But they all deliver the same root value: by compounding your wealth over time, it gives you the freedom to live the life you want.
That lets me multiply my impact on the world.
3 things that caught my eye this week
Appetizer: Spotted on a Detroit layover: Someone charging their Tesla at GM’s HQ. Talk about foreshadowing.
Main: On Franchise Friday, Heather Endresen and I broke down a car rental franchise on Aquisitions Anonymous. Is it a lemon?
Dessert: This quick story about how Cargo Shorts Guy changed my buddy Bill D’Alessandro’s life. It’s all about the fundamentals, baby.
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Thanks for reading!
My question for you: what's the biggest challenge you're facing right now?
Reply to this email and I might answer you (anonymously) in the next issue!
Michael
