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What is an umbrella corporation?
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In this article, I will break down the meaning of Umbrella Corporation so you know all there is to know about it!
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What Is An Umbrella Corporation
An umbrella corporation refers to a corporation that owns and operates different businesses under the same corporate entity.
In other words, an umbrella corporation owns and operates many different businesses that can operate as distinct businesses but with the financial support of the umbrella corporation and backed by its credibility.
For instance, Amazon is a company that acts as an umbrella corporation as it owns and operates different businesses as distinct subsidiaries, such as Whole Foods in the grocery business.
Many large corporations tend to become umbrella corporation over time as they may acquire businesses that they continue to operate as distinct businesses.
As the name suggests, an “umbrella” corporation is a corporate entity that oversees other business entities that it owns.
Umbrella Corporation Structure
An umbrella corporation is fundamentally a corporation, which is a specific type of corporate entity allowing its shareholders to benefit from limited personal liability.
The term “umbrella” is used to refer to the fact that the corporation owns different corporate entities or businesses.
In essence, the term umbrella is used as a metaphor to indicate that one corporate entity is sheltering, supporting, or overseeing, many other business entities.
The corporate umbrella can be either a private company or a company traded on a stock exchange.
The corporate entity itself will own the shares of the different business entities it owns and operates.
The business entities owned by the umbrella corporation are typically referred to as the subsidiaries.
Umbrella Corporation Advantages
There are many advantages to having a corporate entity act as an umbrella to other businesses it owns.
The primary advantage for the umbrella corporation is to diversify its business risk.
By owning different businesses and smaller brands, the corporate umbrella can diversify its revenue streams.
Owning several subsidiary businesses in different segments allows the umbrella corporation to generate cash flow in a more consistent and reliable manner.
If one subsidiary does not do well, other subsidiaries can compensate for the losses.
Another key advantage in operating an umbrella corporation is that the subsidiary businesses can benefit from the brand and reputation of the umbrella corporation.
For example, Coca-Cola is an umbrella corporation but owns different brands selling snack foods and other products.
Coca-Cola’s snack food businesses can benefit from Coca-Cola’s brand value and credibility.
Another important advantage to operating an umbrella corporation is that the corporate umbrella can use the cash flow from its profitable subsidiaries to finance the expansion of the corporation’s core business, acquire other businesses, or finance the growth of specific subsidiaries.
In essence, the corporate umbrella becomes a financing entity funding itself or its subsidiaries to achieve a specific objective.
Corporate Umbrella Disadvantages
Although operating a corporate umbrella can have advantages, you should also be mindful of the disadvantages.
The most notable disadvantage in operating an umbrella corporation is that it’s difficult for a company to operate many distinct businesses, in different markets, with different needs, and competitive landscapes.
It’s challenging to internally streamline business operations and achieve greater efficiency when each subsidiary is engaged in different types of business activities.
Another key disadvantage in operating a corporate umbrella is that the different subsidiaries can engage in competitive behaviors against one another if they operate in similar industries.
If that happens, the corporate umbrella will lose as one subsidiary can cannibalize another subsidiary’s business.
Another drawback is that the corporate umbrella management will generally not have the level of expertise in operating all of the different subsidiaries in different industries.
As a result, they will have to heavily rely on the subsidiary management team to get accurate information about the business.
Since the corporate umbrella has to rely on many different management teams for the success of the overall business, it may lead to internal politics and conflict.
Umbrella Corporation Example
Let’s look at an example of an umbrella corporation to better understand the concept.
There are many examples of umbrella corporations but we’ll go over a few of them to illustrate the point.
The first example is the Virgin Group.
As an umbrella corporation, the Virgin Group owns and operates businesses in different industries like airlines, books, media, mobile, spa, life care, games, and more.
Another example is Proctor & Gamble which is an umbrella corporate entity owning businesses producing a wide range of consumer goods such as shampoo, toothpaste, skin care, medication, and more.
Another famous umbrella corporation is Coca-Cola which owns and operates businesses in different industries related to its core soft-drink business, such as fruit juices, fruit-flavored soft drinks, snack foods, and more.
So there you have it folks!
What is an umbrella corporation?
In a nutshell, an umbrella corporation is a large company owning smaller businesses.
The small businesses are able to benefit from the corporate umbrella’s credibility, reputation, and brand equity.
Within umbrella corporations, the smaller businesses will generally be operated as distinct businesses but will have the financial backing of the umbrella corporation.
There are many large brands out there that are considered umbrella corporations such as Pepsi, Coca-Cola, Amazon, Apple, Proctor & Gamble, Unilever, Kraft, Virgin Group, and more.
Now that you know what an umbrella corporation is and how it works, good luck with your research!
I hope you enjoyed this article on Umbrella Corporation! Be sure to check out more articles on my blog. Enjoy!
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