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Definition: Spin Out
Spin Out is a process in a company where the composition of a company changes by splitting the various verticals of the business into different businesses. After the spin off, the new part becomes a new company itself with a new workforce, policies, infrastructure etc.
In simpler words, when a spin-out happens, the company splits off sections of itself as a separate business.
This phenomenon of spinout is also known as a ‘starburst’ and ‘corporate spin-off’. Spinouts are recognized when the parent company owners receive equity stakes in the newly spunout company.
The new ‘spun out’ company includes some of the parent’s company’s assets and intellectual property. It is common to find ‘parent companies’ supporting the ‘children’ companies by investing in them, quite often management teams of the new firm is drawn from the parent firm. New spinout companies, eventually become independent businesses derived from the parent company.
Reasons for a spin-out
• To market a new product under a different company name.
• To avail the opportunity for a unique vertical
Advantages of a spinout
• Better management and operational efficiency
• Spinouts also allow high-growth divisions of the company to command higher valuation multiples.
The parent company or organization may offer support during and after the spinout by:
• Investment in new division
• Providing incubation space and legal, finance, or technology support
Spinouts can occur at times, when companies cannot find buyers for some parts of their business. Another possibility of a spinout is when individual employees or a group of employees leave an existing entity to form independent firms. A spinout can also occur due to mirror company formation which simplifies listing of the firm on stock exchanges.