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When Should You Start A Holding Company?

Many entrepreneurs diversify too soon and risk losing everything.

When Should You Start A Holding Company?

I've had a number of recent conversations with entrepreneurs who are keen to establish holding companies. Maybe the new year has spiked their ambition, or perhaps they see real opportunities in a fractured economy. Either way, they aren't satisfied with growing one business, they want to build a business empire.

Owning a portfolio of companies that share strategic synergies may sound like a very attractive proposition, but most of the attempts I've witnessed have resulted in paper tigers. Even worse, some have relied on cross-collateralisation, creating a house of cards that collapses at the slightest wrong turn.

There's nothing wrong with being extremely ambitious. If anything, I think most business owners are too conservative and squander their potential. There's also nothing wrong with building multiple revenue streams across a mix of verticals. But trying to bootstrap several companies simultaneously is stupid.

Starting a business is easy, but turning a startup into a successful business is a very different challenge. Just because you own a business doesn't mean you own a good business. So until you've built at least one good business, it's irresponsible and arrogant to juggle a basket of subsidiaries.

How do you know whether you have a "good" business?

In the context of establishing a holding company, there's a very simple litmus test: when your ownership earnings (i.e. dividends) match or exceed your employed earnings (i.e. salary and perks), then you can think about more than one business.

Until then, you're a mogul on paper only.