Marketing Pros and Cons of Setting Up a Subsidiary Company

If you are involved in the running of a well-established company and have one or more distinct and fast-growing divisions for different target markets, you may have been weighing up the advantages and disadvantages of creating a separate business to serve one of those niches.

Business Plans

 

This brief article looks mainly at the marketing pros and cons of setting up a subsidiary company, as well some other factors to consider.

Staying As-Is

Pros of staying one large company

If you have been established for many years, that age gives potential clients a high degree of trust that you will still be there in 2, 5 or 10 years to support their needs. Your company name will form a lot of this trust and potential clients that hear the name could see this stability from a basic company search by name.

For recruitment, your current structure may show job hunters that they could work for a large company with potential sideways, as well as upward progression.

Potential clients will see a relatively large team with diverse skillsets, and likely back-up if key staff leave or are absent / unavailable.

In terms of the website and SEO, content added to an established site tends to have a chance of higher chance of gaining search engine traffic due to the strength of the website gained over many years when compared to a brand new site.

Cons of staying as-is

With your company’s history and depth of website content focused on its more established target market(s), this can sometimes overshadow a new division. The result is that some potential clients of the new division may report that the company is too focused elsewhere, while you may never even hear from other potential clients who discount your newer division without ever making an enquiry – these could even be a ‘silent majority’.

A wider downside of serving an increasingly diverse range of clients could also be that it is to the detriment of sales to your historically core market as well. Some potential clients may start to feel that you are spread too thin or lack expertise in their needs. The fact that you are likely to have niche competitors focused only on their needs means that when a customer wants a company who truly understands their needs, you may look too ‘Jack of All Trades’ to make their shortlist – even if that is not the case.

 

Forming a Subsidiary Company

Advantages of setting up a new company

A new website and company would create brand ‘focus’. Potential clients would likely gain reassurance from the fact that your new company understands its needs due to this focus, and has staff with the necessary specialist skills and experience.

Clients in the industry of your subsidiary would not complain of a perceived focus elsewhere, while your main brand could return to its roots of being specialists in its original core target market.

A separate company can negate the business risk to the parent company if something was to go wrong in the subsidiary – financially or legally.

For the purposes of liability, taxation and regulation, subsidiaries are distinct legal entities.

– Investopedia

Creating a subsidiary company from a major division seems to be a progressive move based on what many other large companies in such situations often seem to do.

Famous investor Warren Buffett’s Berkshire Hathaway, Inc. has a long and diverse list of subsidiaries, including Clayton Homes, the Pampered Chef, GEICO Auto Insurance and Helzberg Diamonds.

– Investopedia

A new website focused on the needs of a specific target market may attract links from other website owners who want to signpost providers of services specific to this niche. Search engines may favour a focused website for phrases in this niche in the medium / long term vs a more generalised website.

 

Disadvantages of creating a separate company

A newly formed and / or a smaller company may look a less secure supplier to large corporate organisations and may even fail their due diligence assessments of company age and size.

A smaller team may appear to lack the depth of talent and staff back-up available in larger companies.

A basic company search for the subsidiary alone may fail to show a potential company the secure history of the parent company.

Signposting the parent company would be required as part of marketing activities to negate the risks above.

At least in the short-term, a new website would need time to gain trust and strength in order to compete in search against larger / more established websites.

 

Overall Summary

Creating a subsidiary company from an up and coming business division looks like the long-term progressive move from a marketing, finance and legal perspective, given the behaviour of many other large companies with distinct divisions.

There will be some headaches to overcome, such as the short term pain of creating new a new website, and taking care to reassure and signpost potential clients to the secure parent company background.

From a marketing perspective, creating a new website and subsidiary company for an offshoot division could give greater clarity to website visitors and potential clients looking to use solutions within both your historical and your relatively new target markets.

 

Related information elsewhere on the web:

http://www.smallbusiness.co.uk/starting-a-business/setting-up-a-company/22496/starting-a-subsidiary-company.thtml (UK)

http://www.vernimmen.com/html/articles/article16.html (US)

http://smallbusiness.chron.com/advantages-opening-new-division-15843.html (US)

http://www.investopedia.com/terms/s/subsidiary.asp

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