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Grow Your Business by Creating Divisions

Is it time to spin off part of your company?

Customers of the Islamic lending unit that Stephen Lange Ranzini started at his 70-person company, University Bank, liked being able to obtain financing without breaking religious prohibitions against paying interest. But many weren't comfortable dealing with a bank, so in 2005, the 41-year-old Ann Arbor, Michigan, entrepreneur spun the Islamic financing unit off into a new company in a deal that netted the $8 million business a $1 million profit. University Islamic Financial Corporation offers customers financing in a number of ways that still allow the company to earn a profit. And University Bank kept 80 percent ownership of its former division, so it will continue to benefit if UIFC does well. If you find that outcome tempting, consider these tips for spinning off a business of your own.

1. Don't automatically rule out the possibility. A spinoff may seem suited only for big companies, but many smaller firms have divisions that made sense at first and have since become distractions, according to Bruce Kemelgor, a University of Louisville entrepreneurship professor. "As businesses become more complex and diversify, they find their skill set becomes so thin, they're no longer able to capture the value that drove them to initiate that aspect of their business," Kemelgor says. Another consideration: Spinning off a unit can keep the parent company just the right size so you don't have to delegate too much control to others.

2. Spot the spin. If you have a profitable and valuable business arm requiring management skills or other attributes that clash with your core business, consider giving it a spin. "Does the business need its own dedicated staff and mission?" asks Ranzini. "If so, it might be a candidate for a spinoff." At the same time, he warns, "Don't do it unless you have a really good reason. Complexity is costly."

3. Pick the right people. Before letting go, make sure the new company has the right leaders. If they're not entrepreneurial enough, they may not be able to effectively lead an independent entity. On the other hand, if they're too independent, the spinoff may begin to conflict or even compete with its parent. Says Kemelgor, "The top management team has to be the right mix so the culture and values of the parent organization are supported and people aren't feeling the need to take off on their own and break off the rear-view mirror."

4. Keep a piece of a winner. You don't have to give up complete ownership or control of the spinoff. Spinoffs often involve the sale of only a minority share of the business, and keeping a chunk can give you a share of future profits and any increase in value the spinoff may experience. "If there is no upside, sell it all to refocus," says Ranzini. "If there is good upside, keep as much as you can."

5. Keep your eye on the ball. No matter how bright the spinoff's prospects as an independent entity are or how well it eventually does, be sure you continue to concentrate on the parent company's activities. Fill its executive suite with well developed managers, let them do their jobs and keep doing yours. "If the same management team is running both firms, it's easier to take the eye off the ball in one of the two businesses," says Ranzini. "How can you be focused on two different things?"

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This article was originally published in the December 2006 print edition of Entrepreneur with the headline: Spin Cycle.

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