A holding company has become a popular choice for many family-owned businesses. Building on the concept of the Group Center, numerous family businesses establish formal structures through holding companies. Tata Sons Limited serves as the holding company for the Tata family, investing in various sectors.
In Hong Kong, Li Ka Shing established Cheung Kong Holdings. In Germany, KB Holdings is the investment vehicle for Heinz Hermann Thiele, owner of the Knorr-Bremse Group, the largest manufacturer of train braking systems. Meanwhile, in South Korea, the government encourages chaebols to form holding companies to improve governance and transparency.
Based on data from the Korean Fair-Trade Commission, the total number of holding companies in South Korea grew in 2021. The increase was modest, rising from 164 holding companies in 2020 to a total of 168 in the following year.
Why Family Businesses Choose Holding Companies for Growth and Stability
Family-owned businesses opt for holding companies for several reasons. Rapidly growing family businesses often diversify into various ventures, such as manufacturing, services, real estate, patents, and small investments in other businesses. A holding company consolidates these diverse assets and businesses as subsidiaries under one parent company.
Many family-owned businesses struggle with control and ownership issues as they grow and diversify. Expanding with different subsidiaries can lead to conflicts within an expanding family. A holding company helps manage these challenges by consolidating portfolios and creating synergy among subsidiaries. It also helps preserve family harmony by providing opportunities for family members to participate equitably in the business, aligning with their interests and talents. Senior family members can retain managerial positions while giving younger members opportunities to run the business.
A holding company ensures all ventures receive attention, avoiding favoritism within the family. It also aids in estate planning and intergenerational asset transition. In the United States, many multi-generational family businesses use holding companies to make management more transparent, benefiting family members, professionals, lenders, communities, and other stakeholders. Holding companies can also protect against hostile takeovers, as seen with the Hermes family in 2022, who agreed not to sell their shareholdings for at least two decades to prevent a takeover.
From a business strategy perspective, holding companies develop the value chain, supporting activities related to product creation, sales, delivery, maintenance, and overall operations. Especially for family businesses.
Case: Korea Kolmar Holdings – Value Chain Development through Holding Company
In 2012, Kolmar Korea became a holding company, a first in the South Korean cosmetics industry. This move increased its market value from $33.5 million USD to $49.1 million USD. Korea Kolmar Holdings started as a cosmetics company and expanded into the pharmaceutical and health food industries through its subsidiaries. Initially, Kolmar Korea was an Original Equipment Manufacturer (OEM) but later adopted the Original Design and Manufacturing (ODM) model, developing products independently. Although this company is not a family business, this example is still relevant in illustrating a holding company.
During the late 1990s economic crisis in South Korea, cosmetic companies outsourced their assembly processes, benefiting Kolmar Korea as an ODM. By 2002, Kolmar Korea expanded into the pharmaceutical sector, where ODM is known as Contract Manufacturing Organizations (CMO). They manufactured generic drugs, starting with ointments similar to those used in cosmetics. Kolmar Korea bought BRN Science, a bankrupt company with a state-of-the-art pharmaceutical plant, renaming it Kolmar Pharma, which quickly became a leading pharmaceutical CMO.
Kolmar Korea’s corporate size grew, leading to its restructuring as Korea Kolmar Holdings with four subsidiaries: Kolmar BNH (cosmetics and health supplements), Kolmar Pharma (pharmaceuticals), Pharmascience Korea (pharmaceuticals), and Kracie (pharmaceuticals). This change doubled Kolmar Korea’s stock price, reflecting investor confidence.
Korea Kolmar Holdings enhances synergy by rotating staff between cosmetic and pharmaceutical research centers. They established an integrated technology institute to facilitate collaboration among research centers. In 2022, Korea Kolmar Holdings acquired all Kolmar trademark rights from the Kolmar Group, transferring ownership from a US company to a South Korean company.
Korea Kolmar Holdings positively impacts synergy among subsidiaries and employee development. The holding company structure benefits both the cosmetics and pharmaceutical sectors through a shared research center, enhancing the value chain. Human resources competency and research and development (R&D) are crucial for Kolmar Korea Holdings’ competitive advantage.
Preparing a Holding Company in Family Business
Before establishing a holding company, several factors must be considered, including finances and compensation, which can cause conflicts if not handled properly. Funding for new companies under the holding company should be managed objectively, possibly by an independent party.
The holding company’s structure should align with the vision of the family business. A clear purpose for creating the holding company is essential. In multigenerational businesses in Europe and Latin America, holding companies encourage growth while maintaining family harmony. They view the family business as a resource to build a business empire and empower the family, working hard to achieve their dreams through the holding company.
