When I first read about Google’s corporate restructure, incorporating Alphabet – I was left with more questions than answers. To really wrap my head around it, I asked James Carey, a Director at Prime Partners and an expert in this area, to help us out by outlining what the change means, why Google made the change, and more importantly – what the SME space can learn from it.
So by now you may have heard that Google is now Alphabet, or something like that.
As a consumer of Google search, YouTube, Android and so on, you may not notice any changes, but as a business owner there are important takeaways for you.
A bit of history…
Google was founded in 1998 with the goal to make searching the Internet quicker and more accurate than had been provided before (anybody remember AltaVista, Ask Jeeves, Web Wombat?).
With the majority of its revenue coming from booming online ad sales, Google began acquiring other companies and technologies. In fact, as at April 2015 Google has acquired over 180 different companies.
So over its 17 years, Google has evolved from a company providing consumers with a better way to search through billions of web pages, and selling ads to businesses, into a disparate conglomerate of many different companies doing many different things.
So what’s happened?
When Google became a listed company in 2004, the public bought shares in Google Inc. (the American equivalent of “Limited”). Very simply the company structure would have looked like the below.
The big announcement earlier this month was that Google has decided to create Alphabet Inc. as a new company above the original Google Inc., and spin various products/technologies into separate companies that sit alongside the core search business, rather than bundled in with it. Kind of like the diagram below.
So why has Google done it?
The general consensus seems to be that the leadership team is aware that Google’s revenue from the search business will decline over time, so by restructuring, it is separating its other businesses from the core search business. For example, instead of Nest, the home automation business, being a child of Google, it’s now a child of Alphabet, and a sister or brother to Google.
It’s partly cosmetic and it’s partly physiological. Google’s former CEO Larry Page and President Sergey Brin are now moving up a rung to run Alphabet, which invests in a suite of companies. Each company then gets its own CEO who will focus on its specific business.
Some people have compared Alphabet to Warren Buffet’s Berkshire Hathaway, an investment company that owns many different and independent businesses.
How is this relevant to me?
One key lesson that small business owners can take away from Alphabet is how a holding company can help to mitigate risk.
Let’s say you run a successful construction business, and you decide to do a property development. Would it make sense to do it in the same entity as your building company?
It would be a terrible idea! If your development goes bust, your successful construction business will most likely go bust as well. As there is a single entity, creditors have access to all of the assets of the building company.
So what about having our building business own the development in a separate company?
This is how Google evolved over the years; it just kept adding things under the main entity. The downside is that if your construction business got into strife, then your property development is at risk as it is another asset of the company.
The solution? Why not do what Google has done, insert a new company above your main trading company, and then have it own the new development company.
This way, the two separate businesses are insulated from one another should something happen to one of them. As the holding company does nothing other than simply own the assets there’s little risk of anything cascading down to infect the children (the trading entities).
This strategy is not new; in fact many people have questioned why Google didn’t do this sooner. Below is a very simplified example of the Wesfarmers (Coles) corporate structure. Each box represents multiple entities. If somebody sues Officeworks, Target Country is protected.
So that about sums it up. The creation of a holding company is relatively easy, with the ATO providing capital gains tax (CGT) relief where the ultimate owner does not change. youtube down The extra cost of compliance shouldn’t be too burdensome either, but it’s best to speak to your accountant if you have any questions.
One more thing…
An alternative that has proved popular amongst many small business owners is the use of a family (also called discretionary) trust. This trust either acts as the holding company or sits at a level a level above the holding company.
Family trusts can provide excellent asset protection along with the flexibility of sharing the profits of your businesses with your family members. But family trusts do add another level of complexity and there are tax consequences of adding a trust to your existing corporate structure. https://myaccounts.com.au/google-now-alphabet/You should definitely seek professional advice from your accountant.
James Carey is a Director at Prime Partners, an accounting firm based in Sydney. His ‘why?’ is to help small business owners improve their lives by making business easier, especially with the help of technology.