One of our mentors recently gave me some advice that I have never received in all my years as an entrepreneur nor was taught during business school. We were discussing a new entity company that will provide services to businesses and going over the name and reasoning behind it.
He suggested that we follow the Coca-Cola example of creating a holding company with the brand and then a separate operating company that licenses the brand and executes the actual contract.
The reasoning was that if there ever was a legal issue and a lawsuit came about, it is the operating company that would be sued. If it had to close down then the holding company would simply cancel the licensing deal and then license the name to a new operating company.
We passed this by a second advisor and he agreed but for a different reason - potential sale in the future.
He pointed out that by separating specific operations into separate entities, you can later sell part of the business that someone maybe better at than you while retaining the core brand.
This immediately reminded me of Berkshire Hathaway buying Wal-Mart’s distribution unit, McLane and Co. back in 2003. It only supplied Wal-Mart at the time but now includes other clients.
Normally entrepreneurs think of creating just one company to own the brand and to operate. This would mean that a lawsuit, even unwarranted, could bankrupt the operating company and leave an entrepreneur with no asset. This also would mean that you would have to create a subsidiary later as an operating unit if there is an opportunity for a sale or spinout of one part of the business.
While entrepreneurs tend to be overly optimistic about how things will turn out, I have been taught to always plan for the downside. Few of us think about getting sued because we intend to deliver the best service possible to our clients. Planning to protect the brand and hard work is still wise.
Coming from this advice we will now create a holding company with the brand and an operating company that licenses the brand to execute client work. Figure out if this is something that makes sense for your venture.