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Piece of the Pie

If your industry's facing consolidation, forming your own holding company may keep your business from getting swept up by the big guys.
May 1, 2005
URL: http://www.entrepreneur.com/article/77298

More than a year ago, Jamison Kuiper, president of Rasmussen Siding and Roofing in Grand Rapids, Michigan, noticed some disturbing trends in the $250 billion home remodeling industry. A wave of consolidation was sweeping up smaller players, and huge manufacturers were venturing into installation--Rasmussen's small piece of the pie. "It was either act, or get run over," says Kuiper.

Kuiper and his father and partner, William, 55, opted for the former. But their simple S-corporation structure wouldn't allow them to bring in additional partners to help fund the acquisitions they had in mind. At the same time, they felt they needed a single brand they could more easily market in new regions. "The name Rasmussen means a lot to people in Grand Rapids, but it doesn't mean anything to people in Ohio or Indiana," says Kuiper, 31. "As far as streamlining our marketing dollars, we would rather market one brand than 100."

Ultimately, the answer was a corporate restructuring that formed a new holding company called Your Home Design Co., a limited liability company where all new acquisitions would become wholly owned subsidiaries. The new structure afforded several advantages: The Kuipers were able to bring in additional investors to fund future acquisitions, the first of which was All Gutter Systems, a company that focuses on gutter protection and solutions for homes.

In addition, from a branding standpoint, they can market Your Home Design Co. in new areas while phasing out locally recognized brands more gradually so as not to lose core customers. They can also offer the former owners of acquired businesses an equity stake in that business (but only in that business), which can help ease the transition.

Ways to Grow

If you are poised for growth and expect to make several acquisitions in the near future, consider restructuring your business to more easily integrate your new purchases. Most experts advise structuring the parent as either an S corporation or an LLC. The LLC gives you maximum flexibility in terms of owners and investors, as well as a tax break. For federal tax purposes, LLCs are treated like partnerships and typically don't have to file individual tax returns or pay the government separately.

Like LLCs, S corporations are taxed at the individual owner's rate rather than the corporate rate, which makes them preferable to C corporations. Because each situation is different, however, consult an attorney who specializes in this area to make sure you're choosing the right structure, from both strategy and tax perspectives.

One key advantage to keeping newly acquired companies separate from the parent is that it significantly limits liability, says Robert Stead, an attorney with Miller, Johnson, Snell & Cummiskey PLC in Grand Rapids, Michigan, who handled the Kuipers' restructuring. "You can do as much due diligence as you want, but at the end of the day, you're always going to find things that aren't as represented," he says.

If a past problem resurfaces after the sale, or if the new business turns out to be a dud and goes bankrupt, an LLC or a parent subsidy structure will shield the assets of the parent and the other subsidiaries from potential liability.

The downsides of the holding-company structure are the added costs and administrative burdens on the already-taxed small-business owner: separate bank accounts; records and meetings for directors and stockholders; and fees to operate outside the state in some states. Depending on the structure, you may also have to file separate tax returns.

But for those entrepreneurs who aim to buy multiple companies in different locations, the LLC's advantages of flexibility and insulation from liability will probably outweigh the costs. And for those in consolidating industries like Kuiper's, there may not be much choice. Accumulating strength in numbers may be the only way to keep the big boys from eating you for lunch. Says Kuiper, "It's survival."


C.J. Prince is executive editor of CEO Magazine.