For those Small Medium Enterprises that are wanting to re-structure themselves in order to increase their scale of operation, there are options available to you that don’t involve merging. Here are a few alternatives:

  1. Add one or more additional shareholder. Often this is done in order to increase venture and/ or working capital, or to introduce a range of skills/ expertise that isn’t otherwise available among existing personnel.
  2. Crowd funding to raise venture capital for expansion and/ or new product/ service development.
  3. Form a “parent company” which is collectively owned by shareholders who are logically related due to the market sphere/      sector that they operate in. For example, a web site design company could combine with a graphics design company and an electronic payment gateway company under one brand – that being the brand of the parent company.

Parent companies are a particularly effective way of combining strengths and expertise of shareholders. Each joining company retains its own company status as (for example) a Limited Liability Company, but then also becomes a shareholder in the parent company. 

The beauty of well-aligned SME’s working together under a parent company structure is that, from the customer perspective dealing with the one (single) parent company and receiving a single invoice for work performed is a lot simpler than dealing with say 3 different companies and therefore receiving multiple invoices for work performed.

For example, a customer wanting an e-commerce website designed and built by the parent company referred to in the example above, would be able to go to the one parent company (let’s assign the trading identity “One Stop Digital Shop” to this entity) to have their website developed, because the website design capability, graphics creator and electronic payment gateway expertise are all under the same banner. They will each contribute their expertise towards the production of the client’s desired website, and as a result a single invoice only will be produced – reflecting the brand of the parent company.

Parent company structures work well for operators that offer the same (or similar) product categories – such as a Franchise. For example, a parent company based in Canada which focuses on retailing jewellery in Austria, Denmark, China and New Zealand. Each operation in each country has a network of retail outlets. All of the retail outlets across all of the countries concerned operate under the same common business brand, so the B2C customer experience in all countries is only in relation to this one brand.The network of retailers in each country is in the first instance affiliated with the company Head Office in the given country, and in turn the retailer network per country is a subsidiary of the Canadian based global Head Office/ company. Often international companies will structure themselves in this way to enable easy “culling” of under-performing individual subsidiaries, and for cost centre accounting purposes. End of year financial performances across all subsidiaries are typically then combined in the preparation of EOY consolidated accounts. 

Benefits of forming a parent company – particularly those formed between SME’s – can include:

  • The individual business units cease being competitors and become comrades, working in the same common direction in accordance with the Parent Company Strategic Plan.
  • It enables pooling of financial resources to be able to afford to purchase the most up-to-date equipment/ technology, etc needed, and a proper marketing programme.
  • Invoicing of clients can be achieved through a Central Billing function – resourced by 1 – 2 administration employees; rather than have at least 1 admin person per individual business unit processing invoices.
  • It creates the opportunity to successively attract more aligned stakeholders to join the parent company over time, and then perhaps justify the appointment of a General Manager to pursue attracting further new shareholder interest as well as oversee the operation – from accounts to marketing to legal compliance.

The beauty of the kind of Parent Company structure where shareholders remain owners of their own respective companies, is that in the event that one or more shareholder wishes to cease being a shareholder of the parent company for whatever reason and at whatever stage, then they can simply terminate their involvement with the parent company and resume trading under their own trading identity (business brand) under their own company structure.

During the last quarter of 2016 I delivered a presentation to a Rotary Group in Hawke’s Bay which concentrated on how to step away (and move up) from a Small Medium Enterprise (SME) mentality and build scale through the use of alternative proven commercial structures. This presentation can be found on the first page of my LinkedIn profile here if you’d like to view it. The president’s response to this presentation can be found as “Testimonial #1” in the ‘Testimonials’ section of my company website here.