Reviewed by Oct 05, 2020| Updated on
A parent company is an organisation which has the interest of controlling another entity, providing it with the control over the operation. Parent companies may be hands-off or hands-on owners of the subsidiary companies. It depends on the extent of managerial authority provided to the managers of the subsidiary firm.
One must not confuse a parent company with a holding company. The two cannot be used interchangeably as parent companies operate their own operations while holding companies are set up, particularly for owning a group of subsidiaries.
They are generally set up for the purpose of taxation. Parent companies may be a blend of several seemingly unmatched business whose business diversity brought in by the business wings are going to provide advantage from cross-branding.
In an alternate arrangement, parent companies and subsidiaries can be integrated horizontally, such as Gap Inc, which is the owner of the Banana Republic and Old Navy. They can also be integrated vertically by being the owner of various companies at several stages of the supply chain or production.
Two of the most popular ways of a company becoming a parent company is either by way of acquiring a small company or by way of a spinoff. Larger companies generally purchase smaller companies outright in order to avoid competition, enhance their areas of operation, to lower the burden of debt, or to gain unification.
Becoming a parent company and owning several other entities would help the business in getting more customers, and increasing their chances of broadening their product offering, which will ultimately result in generating more leads. This would later help in enhancing the overall revenues of the parent company.