3 Things To Consider When Deciding To Create A Spinoff Company

When your company has grown and scaled significantly and a new product or service has scaled within the larger operation, many consider turning one of the business units into  a “spinoff company,” or a brand new company that’s peripherally related to the main one. Many successful companies are spin-offs: Trello, the productivity company is one, and Ferrari was a spin-off from Fiat. But many wonder how to decipher when to create a spinoff company vs. when to keep the separate business operating underneath the umbrella of the current company. 

Of course, it depends on a number of factors, such as resources, team, and the art of the new business. But, here are three reasons why creating a spin-off company should be considered. 

1. Customers Connect Better To Brands That Promote One Thing

Matt Mickiewicz, the founder of SitePoint, created a spin-off because in his words, “people can only associate one thing with a name.” And it’s true; if you originally purchased from a company because they sold you dog food, and now they’re selling an app that tracks how far your dog walks everyday, it’s confusing what type of company they are or what it is they stand for… even though both offerings are somewhat related to the same thing.

The actual definition of a spin-off company is when a larger company spins off one of its mature business units. Perhaps your company was founded originally with one technology, but the new and distinct technology recently introduced has scaled so significantly that it’s nebulous which one your company specializes in. Once things get confusing in the mind of a consumer, they’re more likely to have questions and less likely to buy. In this case, it’s a better idea to have two separate companies that both have their area of specialty rather than keeping two different offerings under one umbrella. 

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2. Talent Should Go Where Their Talents Are Best Applied 

Your team and top talent should also be considered in debating the possibility of a spin-off.  If suddenly the business offerings under your company expand and change, then your team is forced to wear more hats than they’re used to, which means they stray away from why they’re hired. To think this one through, consider the Fiat and Ferrari example. Because Fiats and Ferraris are at totally different price points and for different demographics and target customers, there’s a difference in how they’re branded and what they offer. 

Of course in large companies, the departments between one offering and the other would be separate, but it also comes down to company purpose and culture. On BlogThink Big.com, author Angela Bernardo states that “In general, a spinoff tries to take advantage of several purposes, such as retaining talent.” Talent want to stay where they feel most committed to a company purpose, and when that starts to get hazy in the presence of new offerings and intra-business units, they may leave. It’s best to start fresh with a new team once the spin-off has been completed successfully. 

3. Sheer Opportunity

Finally, the opportunity associated with creating spin-off companies shouldn’t be discounted. Because spin-off companies are created once an intra-business unit grows significantly, demand is already present. Committed customers to your current company will be interested in potential spin-offs, especially if they’re called spin-offs. 

Alan Gokoglu and Fotios Tsiouklas, two of Australia’s youngest self-made millionaires, know this well. They got their start by scaling an Instagram growth service called Kickspan where they serviced over 5,000 customers, and have since created several spin-off companies, one of which is called “Kickspan Apps.” Leveraging the same advertising methods they offered their customers, they continued to create several spin-off companies including top-charting games, Apps4Brands, and even a property portfolio.

“If you actually look at why most businesses fail, you’ll find that most of the time it’s poor marketing,” said Gokoglu. “We created Kickspan to offer our clients several affordable and powerful advertising solutions to help solve this problem. However, after realizing its potential, our software became a gateway to growing our own spin-off businesses in other markets which have now become bigger than Kickspan itself and made our umbrella company far more profitable.” 

Whether you want to start a sister company to your current one or build it under your current umbrella then spin it off, these three considerations will help you decide what is best for your business model. Communicate clearly with your team and customers, and make sure to do what makes the most sense for you and is in alignment with your overall business strategy.

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