BUSINESS PLANS

The Spin-Off: Hiding in Plain Sight

Sometimes the best ideas for new businesses are just waiting to be discovered inside old ones.
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One day at lunch at Patterson Fan Co., in Blythewood, S.C., CEO Vance Patterson noticed something odd. A couple of his employees were cooking hamburgers on an unusual-looking grill. Patterson realized that they had made the device out of spare parts from the industrial fans the company manufactured.

It turns out that the unique shape of the flared fan parts allowed heat to circulate more evenly and kept the unit cooler, compared with most standard grills. Patterson expressed his enchantment. The employees built him one for his birthday. And after spending about a year and a half making refinements, Patterson got the grill patented in his name and the names of its two inventors, James Ballentine and Robert Carter. In 1998, Down South Inc. was born to manufacture and sell the Town & Country grill. Today Patterson heads up the grill company, the fan company, and five other businesses as well.

OK, so most company spin-offs aren't quite so serendipitous. But whether they're a result of happenstance or deliberate planning, spin-offs have an edge. Using another business as a launching pad is easier "for the most part" than starting one from scratch, says Caroline Caskey, founder of Identigene Inc., in Houston. Caskey started the DNA-identification company after spending several years at her mother's lab-based business. "You've got a base of experience to work from," she says.

Spin-off founders often already have contacts with potential suppliers and customers, along with an understanding of their industry and its markets. Sometimes they're taking a tool developed by the original company and building a new business around it.

That was the case with Kevin Daum. In 1999, Daum started BYDH Inc., in Oakland, Calif., by taking a process that his original mortgage-brokerage business had perfected -- facilitating lending for custom home construction -- and automating it for licensed use online by other institutional lenders. "We had the process" at the original brokerage, Daum says, "but we didn't have the resources to take the product and make it prolific."

Caskey's spin-off experience was messier than Daum's was. She'd become interested in the emerging market for paternity testing while working at her mother's business, Laboratories for Genetic Services, but her mother didn't want to pursue it. So the younger Caskey went off to business school and wrote a plan for a company that would do DNA identification. In 1993 she set up shop, sharing space, laboratory facilities, phone service, and back-office operations with LGS. She also remained a vice-president of her mother's company, where her father served as medical director.

In 1998, Caskey finally separated from LGS, moving to new space, albeit just down the hall. By the following year, as her mother neared retirement, Caskey realized that she couldn't dedicate her energies to growing her own company and take over her mother's as well. Her mother sold LGS in December 1999. Identigene has since grown from 15 employees to 30 and last year reached $3.5 million in revenues.

The hardest thing about spinning off a business? "Extricating yourself can be more complicated than it seems," says Caskey. "There's a sense of obligation. We were like sister companies. The biggest difficulty is withdrawing from the other company."

Rifka Rosenwein is a senior writer at Inc.


THE START-UP ISSUE

Part 1: Your Way

The Rationalist: The Death of Gut Instinct
The Copycat: The Next Starbucks
The Spin-Off: Hiding in Plain Sight
The Soloist: Balancing Act
The Idealist: Into the Frying Pan
The Zealot: Mission Critical
The Pro: The Rules
The Accidental Entrepreneur: Field of Dreams

Part 2: Anatomy Update -- Big Plans

Part 3: The Start-Up Diaries -- Year One


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Last updated: Jan 1, 2001




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