Definition
Opco, short for Operating Company, is a term used in business to refer to a company that is responsible for the day-to-day operations in a business structure. This company produces goods or services, generates revenue, and is often legally separate from the holding or parent company. Its main purpose is to run the business, while financial or strategic decisions are made by the parent company.
Phonetic
The phonetic pronunciation of the keyword “Opco” is /ˈɒpkoʊ/.
Key Takeaways
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Importance
Opco, short for operating company, is an important term in business/finance because it designates a company that uses its production means to run its business operations. These companies are typically involved in the production and sales of goods or services while paying for operating expenses such as salaries, overhead costs, and taxes. Understanding the concept of Opco is crucial as this would determine the core operations and profitability of a business. In financial structuring, an Opco is often paired with a Holdco (holding company) that owns the assets, allowing risk and liability to be managed more effectively.
Explanation
Opco stands for “Operating Company” and it plays a pivotal role in facilitating a business’s functions by governing day-to-day operations. The main purpose of an Opco is to focus on the primary revenue-generating operations of a business, which could range from sales, product development, service delivery, customer interactions etc., depending on the nature of the business. It is essentially the company that directly manages and holds accountable for the main business operations, offering its products or services to customers and earning revenues.Furthermore, an Opco is used as a part of an organizational structure known as ‘Opco/Propco’ model. This structure divides a company into an operating company (Opco) and property holding company (Propco). The Opco generally leases assets from the Propco to mitigate financial risk. By separating the operational aspects of a business from its capital-intensive assets, the company can prioritize different business strategies for each section. Opco remains the face of the company interacting with customers, while Propco manages the investments and assets, which can lead to enhanced operational efficiencies and strategic financial planning.
Examples
Opco, also known as Operating Company, is common in many business models where a primary company employs subsidiaries or smaller companies to oversee day-to-day operations. These opcos often handle more routine functions like manufacturing, distribution and plant operations, while the main company focuses on broader strategies and management. Here are three real-world examples:1. Ingersoll-Rand PLC (Main Company) and Trane Inc. (Opco): In 2008, global industrial firm Ingersoll-Rand PLC acquired air conditioning company Trane Inc. Post acquisition, Trane operates as a subsidiary of Ingersoll-Rand, manufacturing and marketing air conditioners while the parent company manages the business on a larger scale.2. Google and Alphabet: In 2015, Google restructured its business under a new parent company named Alphabet. This created an Opco-Popco (parent/holding company-operating company) structure, with Alphabet as the parent company, and Google as one of its main operating companies, overseeing daily internet-related product operations.3. Berkshire Hathaway and GEICO: Berkshire Hathaway, Warren Buffet’s investment holding company acquired GEICO in 1996. GEICO operates as an Opco running the routine insurance business, while Berkshire Hathaway functions as the umbrella organization overseeing non-operational functions like investments and broader strategy.
Frequently Asked Questions(FAQ)
What does Opco mean?
Opco refers to an ‘operating company’ which is responsible for the day-to-day operations of a business.
What’s the primary function of an Opco?
The primary function of an Opco is to run the operations of a business, which often involves producing and selling goods or services.
Is Opco different from a Holdco?
Yes, while an Opco focuses on the daily business operations, a Holdco or a ‘holding company’ holds the controlling stock or memberships in other companies.
What are the risks associated with an Opco?
Risks associated with an Opco are daily operational risks such as product liability, workers’ compensation, debt liability and general economic risks associated with running a business.
Can a business consist of both an Opco and a Holdco?
Yes, many business structures include both an Opco for regular operations and a Holdco for asset protection and management. They together form what’s often called an ‘Opco/ Holdco structure’.
Do Opcos have to report their financials separately?
Yes, Opcos usually must keep separate financial records and report them to the relevant regulatory bodies.
How are Opcos related to Propcos?
Propco is short for ‘property company’ , used when a corporation splits itself into an Opco and a Propco to separate the real estate asset value from the operational business. Often the Propco will lease properties to the Opco.
Can an individual own an Opco?
Yes, an individual can own an Opco, although ownership is often held by another corporate entity like a Holdco or Propco.
Related Finance Terms
- Subsidiary: This is a company that is completely or partly owned and wholly controlled by another company. An Opco, or operating company, is usually a subsidiary.
- Holdco: This is a holding company, which is set up to own other companies (Subsidiaries), including Opcos. It controls the subsidiaries’ policies and oversees management decisions but does not engage in operational activities.
- Joint Venture: This term describes a commercial enterprise undertaken jointly by two or more parties, which share its profits or losses. An Opco may be formed as a joint venture.
- Mergers and Acquisitions: These are transactions in which the ownership of companies, or their operating units (like an Opco), are transferred or consolidated with other entities.
- Asset Allocation: This term refers to the investment strategy of balancing risks and rewards by adjusting the percentage of each asset in an investment portfolio. It could involve allocating assets to an Opco.
