New Business from Old

A question pondered by owners of businesses is how to fit new ideas into existing businesses, or whether the new idea should be the basis for a new business. Often, the new idea arises from an existing part of a business, or is being developed using resources from the existing business. Perhaps it is only because of the current business history that the idea even has potential, for example, if it will be marketed using existing channels to similar customers.

However, if the new product or service is sufficiently different from the existing business operations, then trying to run with it within the existing business structure may not make sense. Even if legally this is possible (that is, you are not operating with a regulated industry which may object to running the two businesses together conceptually), there could be other reasons to run them independently of one another.

For one thing, isolating the two business operations from one another, when being run within a single business entity, becomes difficult, if not impossible. There is a strong bias toward using existing resources for the new venture, which can negatively impact existing operations.

Second, determining the true value of the business can be difficult, since there is no clear demarcation between businesses.

However, the mere existence of an independent business entity does not mean that the business will be any easier to manage, nor does it ensure that true measures of costs and income will be any easier to calculate. However, if the business succeeds, then spinning off the business to be operated independently, or to be sold, or to acquire an investment, becomes a lot simpler to do.

The advice I would suggest, though, is a cross between the two. Internally, consider the business to be separate, operating off its own accounts, with its own books, and “renting time” for any shared resources with other parts of the business. That way, even if the same people are working on the new idea, their contributions can be measured accurately.

If, after some time, it is determined that the business will succeed, then the effort can be made to set up a proper corporate structure for the business which will further isolate the separate business units. If the business does not succeed, then there has been no harm done, and the idea can be easily discarded.