Often, yes, especially if you plan to buy more than one company or bring in investors. A holding company owns the operating company; the buyer and its investors own the holding company. Lenders are comfortable with it, but they lend where the cash and assets are, so they make the operating company a borrower or guarantor, take a lien on its assets and a pledge of its shares, and take a guarantee from the holding company. The key is to agree the structure with the lender before closing, not after, and to write the next acquisition into the documents.
- What a holdco is
- A company whose main asset is the shares of one or more operating companies
- Where lenders lend
- Where the cash flow and assets are: the operating company, directly or through its guarantee
- What lenders take
- Opco lien and guarantee, pledge of opco shares, holdco guarantee, and any personal guarantees agreed
- What the holdco may do
- Usually limited to owning the opco, with a passive holding company covenant
- Why it matters later
- Add-ons can join the existing facility as new subsidiaries instead of standing alone
What the structure is, and why buyers use it
In a holding company structure the buyer forms a company, the holdco, that owns the operating company, the opco. In a stock purchase the holdco buys the target's shares, and the target becomes its subsidiary. In an asset purchase the holdco forms a new opco, which buys the assets. The buyer, its partners and its investors own the holdco, not the business directly. Sponsor-backed deals often stack more than one holdco, so that equity, any holdco debt and management incentives each sit at their own level.
Buyers choose it for reasons that have little to do with the first loan. A holdco gives a single place for investors, partners and rollover equity to sit. It lets a second or third acquisition be owned beside the first, each in its own company, so that a lawsuit or a failed location in one is kept away from the assets of the others, except where a lender has taken cross-guarantees. It makes a later sale of one business, or of the whole group, cleaner. And it can separate real estate into its own company that leases to the operating business, a propco-opco structure.
What it does not do is shield the group from the acquisition lender. Lenders take guarantees across the entities precisely so that the separation buyers want for other creditors does not apply to them.
How lenders take guarantees and security across both
A holdco on its own has no revenue and no operating assets. If it borrows and the opco does not guarantee, the holdco's lender stands behind every creditor of the opco, from trade suppliers to the landlord, because the holdco's only asset is its equity in a company that must pay its own creditors first. That is structural subordination, and senior lenders do not accept it. So whichever entity is named as borrower, a senior lender ties both together.
| Structure | Borrower | What the lender takes | Where it fits |
|---|---|---|---|
| No holdco | The operating company | Lien on opco assets; any personal guarantees agreed | A single company with a few owners and no plans to add more |
| Opco borrows, holdco guarantees | The operating company | Lien on opco assets; holdco guarantee and pledge of opco shares | Common for bank acquisition loans; keeps the loan where the cash is |
| Holdco and opco as co-borrowers | Both, jointly and severally | Liens on both; pledge of opco shares | Stock purchases where the holdco buys the shares; see joint and several borrowers |
| Holdco borrows, opcos guarantee | The holding company | Upstream guarantees and liens from every opco; pledge of all opco shares | Groups with several operating companies; common with private credit and unitranche lenders |
| Propco beside opco | Opco for the company loan; propco for the real estate | Mortgage on the property; lease from propco to opco; cross-guarantees where agreed | Acquisitions that include the buildings; see acquisition with real estate |
Cash has to move up for a holdco to pay anything. The credit agreement controls that through a restricted payments covenant, which typically allows the opco to pay the holdco what it needs for taxes on pass-through income and modest overhead, and limits distributions beyond that. Owners of pass-through entities should read how tax distributions are handled; see tax distributions under a loan. The broader trade-off between lending at each level is covered in holdco vs opco as borrower.
What lenders require of the holding company itself
Where the holdco guarantees or borrows, lenders limit what it can do, so that its value stays tied to the operating company they are lending against.
- A passive holding company covenant. The holdco may own the opco's shares, issue equity, pay its own modest costs and guarantee the loan, and little else. It cannot run a business, take on other debt or grant liens to anyone else.
- A pledge of what it owns. The shares of the opco, and any intercompany loans the holdco has made to it, are pledged to the lender.
- Limits on debt above it. Debt raised by a holdco further up the chain, such as a holdco PIK note used to fund equity, is structurally behind the opco's lenders, but they still read it: they want its interest to accrue rather than pay in cash, and no claim on the opco's cash ahead of them. See holdco vs opco debt.
- A clear change-of-control definition. The credit agreement names who must own and control the holdco. A transfer of holdco shares that breaks that definition is a default, whatever happens at the opco; see change of control as a loan default.
Where investors own the holdco alongside an operator, the ownership table decides who, if anyone, guarantees personally and how the investors' money is counted. Those questions are easier to settle while the structure is still on paper; see buying a company with partners or investors.
Why the holdco matters for the next acquisition
The strongest case for a holdco appears at the second deal. If the first company was bought directly, with the opco as the only borrower, an add-on has nowhere tidy to go. It can be bought by the opco and merged into it, which mixes the two companies' liabilities. It can be bought in a new company with its own separate loan, which leaves two lenders, two sets of covenants and possibly two sets of guarantees with no link between them. Or the owners can reorganize under a new holdco first, which means asking the first lender's permission.
With a holdco in place from the start, the add-on becomes a new subsidiary. It can join the existing facility as an additional guarantor under a joinder, and be financed from an accordion or a delayed-draw term loan sized for it, subject to the credit agreement's permitted-acquisition terms. More on building a platform is in financing add-on acquisitions.
If more than one acquisition is the plan, say so to the first lender. The loan documents can be written to receive the next company instead of blocking it.
Why the structure must be set with the lender before closing
Loan documents describe the borrower, its owners and its subsidiaries exactly. A change to any of them after closing, such as putting a holdco above the borrower, moving the shares, or merging an entity, is usually a change of control or a prohibited transfer unless the lender consents. Consent is not guaranteed, and when it is given it comes with work.
| Set before closing | Changed after closing |
|---|---|
| Borrower, guarantors and pledges agreed in the term sheet | Lender consent needed; may be refused or conditioned |
| One set of loan documents, one set of lien filings | Amended documents, new guarantees and pledges, new UCC filings against new entities |
| Equity recorded in the right entity from the start | Equity may need to be moved or re-documented |
| Tax structure chosen with the purchase | A reorganization can carry its own tax cost or need elections |
| Permitted future subsidiaries written into the credit agreement | Each add-on needs its own consent or amendment |
The practical sequence is simple. Decide the entity structure with the tax adviser and the lawyer before the letter of intent is final. Put it in the lender package, so each lender underwrites the structure that will actually close. Confirm it in the term sheet: named borrower, guarantors, pledges and permitted future subsidiaries. Midas Partners's lender presentation and underwriting memo set out the ownership chart and the borrower structure for exactly that reason, and the package is built in a day once the documents are in; see the package.
Common questions
- Does a holding company protect me from the acquisition loan?
- No. Lenders take guarantees and liens across the holdco and the opco. The holdco separates the businesses from each other's other creditors, not from the lender.
- Should the holdco or the opco be the borrower?
- Banks usually want the opco as borrower or co-borrower, because the cash and assets sit there. A holdco can be the borrower when every opco guarantees and grants a lien, which is common with private credit lenders and in groups with several companies.
- What is a passive holding company covenant?
- A promise in the credit agreement that the holdco will do little beyond owning the opco: no separate business, no other debt, no liens for anyone else. It keeps the holdco's value tied to the company the lender is financing.
- Can I add a holding company after closing?
- Usually only with the lender's consent, because it changes who owns the borrower. Expect amended documents, new guarantees and filings, and possibly tax work. It is simpler to set up before closing.
- Does a holdco help with add-on acquisitions?
- Yes. An add-on can become a new subsidiary and join the existing facility as a guarantor, instead of needing an entirely separate financing.