What are Spin-Offs?
Spin offs are businesses that are launched from another existing company’s product lines or existing patents. These are companies which are made when an existing business decides that it needs to expand into a new market or expand into a different type of product. While this may sound simple, in order to create a successful spin-off, many aspects must be thought through by the team involved in the spin-off. The main two things that must be thought through when starting out are the products’ niche and method of manufacture. There have been a multitude of successful spin-offs in the finance industry, where one company has been split into two or more companies. Some famous examples are Citibank and Travelers Group. The purpose of a spin-off is to capitalize on a product or idea that the entrepreneur feels deserves to be its own company. It is very important for all parties involved to make sure they have a plan for what will happen once the company spins off, because many times “the best laid plans go astray.”
What are the benefits of a spin-off?
There are many different factors that contribute to the value of an idea, it’s important to look at what can make or break your business. It’s very easy to get caught up with the future plans of your company, but it is critical to analyze everything from its current state. Once you have a better idea on what your company is worth, you’ll know whether or not you will be able to generate enough cash flow or debt financing in order to actually start something that can be sold. For example, most startups fail for many reasons, including lack of funding. Many things you can do beforehand will make it easier to find investors who are ready to take your idea off the ground. Perhaps one of the biggest reason why people do spin-offs is because they are looking to increase their chances of raising venture capital (VC). Venture capital financing usually requires staying up to date on which industries you’re in and trying to create ideas that will give your company legitimacy. So if an entrepreneur wants to invest in your company, it’s very important for them to know what your company does.
If the entrepreneur is looking for venture capital and they feel that it might be difficult to get financing because their company falls into a “less popular” industry, then they might want to consider doing a spin-off. For example, say your business sells insurance policies. If you feel like you can successfully start an insurance brokerage business, then you should do the spin-off. It will make it easier for investors to take your ideas seriously.
Another reason why people spin off is because they think the idea will run out of money and funding if it stays in its current state. For example, if you have a mobile app company where you are trying to sell GPS devices, you might want to consider making the development of the GPS device into its own company. This way if the mobile app fails or just isn’t profitable enough, then that’s one less thing to worry about.
Sometimes people will do a spin-off because they think their idea should have never been under their direct management in the first place. Some ideas and products just might not be good enough and it will always be a struggle making them work in their specific industries. This is why it’s better off leaving the “losing battle” to someone else who thinks they can make it work.
What are the risks of a spin-off?
Before deciding, it’s important to consider what exactly you are losing in doing a spin-off. Obviously, one of the main reasons why people do spin-offs is because they feel it is worth more money. It can be easy to get caught up in how successful you think your idea will be when the product launches, but it’s critical to always consider all costs that are involved. Sometimes with certain industries, for example mobile app development, there are many steps that you need to take before launching your product or idea. These steps might be very expensive and some apps might not even become profitable.
Another risk factor to consider is whether or not your idea will be able to sustain itself in the long run. Say you have an idea for a mobile app that sells shoes online, but to sustain the business it would take quite a bit of money. It might be good to consider how far your initial funding will go before you start looking for more money. For example, say you need $500 thousand dollars to launch this mobile app but also need another $1 million dollars to keep it running for one year. You might want to consider if it’s worth having someone else run your mobile app company if they might be able to generate more revenue than you.
Another risk is that the spin-off company will end up not being successful in its industry. It can be very difficult to predict future tech trends, which is why it’s better off to do a spin-off in a tech-related industry. For example, in areas where tech entrepreneurs are trying to launch something new, it might be much easier for them to succeed where others are not. Even within tech startups there are many ways this can play out. For example, say you are doing an app for hotels and decide to make it into its own company. Maybe one of the reasons why you are starting this new company is because there are already quite a few online travel agencies that offer exactly what you’re trying to do. If you think that your company will not be successful in this current environment, then it might be better off just sticking with existing technology.
Another risk factor can be how much money will be generated in the future by your company. Again, if it’s difficult for an entrepreneur to determine the amount of money generated by their initial business idea, they might want to consider spinning out their idea and taking a leap of faith in its potential and profitability.
Some people do spin-offs because they don’t know how to raise enough money. Sometimes there just isn’t enough money coming in and they would rather create two companies instead of one. It can be very difficult to raise money out of thin air, especially with how competitive the market is now. If your business idea is not profitable enough now, it might be better to leave it for someone else to do. After all, less competition means more profit for you hopefully!
It’s common for a company to either create an entirely new division to explore an entirely new market, or spin off one division into its own separate business. Either way, this means you can find many different companies in the same industry. Entrepreneurs are constantly finding ways to see who else is out there and how they compare – and with all these companies competing fiercely on the financial marketplace, it’s an opportunity for anyone willing to take a chance (or already successful at what they do). The choice of whether to undertake a Spin-off or stay with the mother company however cannot be an emotional one but would have to be driven by expert market development analysts, Operation strategists, and New Business Development Consultants. Fintalent, the hiring and collaboration platform for tier-1 M&A and Strategy professionals offers a pool of Consultants required for all your Spin-Off development needs.