A spin-off is a process where a new company emerges from an existing one. In this case, the parent company provides support and financing to the new company until it becomes a separate entity.
Therefore, a spin-off is a form of business financing that functions similarly to an incubator. Once the new company has developed the structure it needs, it can become autonomous and separate from the parent company. It’s a business strategy that encourages new businesses and joint collaboration.
Why Does it Happen?
There are several reasons why a spin-off might occur. Often, a large company decides to invest in outside talent that will continue to generate profits for the parent company. It may also be done to expand strategic horizons in case of crisis.
Additionally, a spin-off may be justified by the need to open a new business unit that has little to do with the main activity of the parent company. In any case, it’s not a merger of companies, but separate entities, with one giving birth to the other and providing support. Therefore, it should not be confused with the concept of subsidiaries or branches, as both companies may have differences in terms of their industry and structure.
Advantages of Creating a Spin-Off
Creating a spin-off company provides advantages in that the parent company ventures into new markets without risking its main business, while still being able to access some new markets. It’s a progressive work that displays greater chances of success. On the other hand, it encourages talent retention, as if there are no growth spaces in the parent company, it’s possible to locate them in partners within a spin-off.
Additionally, it’s created to reduce risks by forming a separate business line, making it easier to manage smaller business units from a fiscal and labor standpoint. It’s also beneficial for the spin-off to receive support from the parent company and its personnel and technology expertise to evolve and gain experience. It’s important to note that this also generates the entry of new investors into the capital of both companies.
Disadvantages of a Spin-Off
Despite the aforementioned advantages, carrying out a business spin-off can result in certain disadvantages. There may be differences in opinions among the shareholders of both companies, and the spin-off process can be expensive. The initiative of a spin-off is not something that any company can carry out, but those that are well-positioned.
Difference between Spin-Off and Start-Up
Both types of companies are characterized by pronounced growth and the presentation of new and original products. However, a start-up involves a larger investment of money and does not have the incubation of a parent company.
Spin-offs are a common practice in the business world, and many well-known companies today have emerged from others. Examples of this include Osram in the lighting industry, previously owned by Siemens. Another example is PayPal, which was born out of eBay and is now one of the most requested forms of online payment.