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Grow Your Business by Creating Divisions

Is it time to spin off part of your company?

This story appears in the December 2006 issue of Entrepreneur. Subscribe »

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.

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