Keys to Creating an Exitable Business (Part 2)

How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table because this is business lunch with Roland Frazier and Ryan Deiss.

Okay, well, with that I'm excited because this in particular is something that I think really gets overlooked and that's having exit ready structures. And I also want to clarify what we mean by exit because to me there are really lots of different kinds of exits and different stages. And so we'll talk about that as well. We're always exiting our business and there's no matter what you do, you will ultimately exit your business one way or the other. And one way that I found to be very effective for doing that is to focus on 12 key things through a capability assessment. So if you're looking at the people of the business and each of these categories is kind of broad, so I think it's good to think about them in a broad way from people. It's like, what about the people that you've got? What about your hiring processes? What about your training and onboarding systems? All of that. If we're. If our target on all of these things is a 10 for you to rate yourself currently and say, how good are my people? Do I have enough of them? Are they trained well enough? Are they high quality people? Could I get better quality people? Should I support them differently? All of that goes into the people side of the business. And so where would you rate yourself on a scale of 1 to 10? Communication. How well is communication in the company taking place? Is the communication between the management and the employees done in a positive and formalized way? Are there assessments and reviews of the performance of the people who are working in the company? Is there a device or mechanism that you've got in the company to take the pulse of how people are feeling in terms of being able to talk with each other? Is there a process for people to communicate suggestions to management about what is going on in the company and what could be done better? And then on the customer facing side, all of that applies as well. How are you measuring and communicating with the customers to see what they think and how happy they might be in terms of net promoter score with the company? How likely are they to recommend the business to somebody else? The culture of the company too? How supportive is the culture? And is it inclusive? Is it diversified? Do people feel they have a stake in the company? What is the customer experience like on all levels? And so we have a whole thing about customer experience and designing and curating that. How are your numbers? Do you know what they are? And do you have enough money to work? And do you have ways to get more money if you don't have enough money right now? All of that is really important and we have a whole process for identifying the five different ways that you're going to fund the business. And 159I think it is different funding strategies that touch on each of those five different ways in your KPIs and your tracking, if it's not measured, it doesn't get paid attention to and you can't correct it. So how are you in your key performance indicators? How are you receiving those? And are you receiving them on a daily, weekly, monthly basis? And are you adjusting them and responding to them and taking action based on them? And is everybody that needs to see them actually getting to see them? Then how effective are your marketing and sales departments both in terms of individual performance and how well do they communicate together? Is there any waste between the leads that you're generating in marketing that sales is not converting or paying the proper attention to? And then does marketing have enough follow up that they're helping sales after each sales touch point to be able to go and communicate and catch follow on sales and put leads back in front of the salespeople when they're ready? Innovation wise, how likely are you to get disrupted? What are you doing right now to acquire new technologies and skills and training and products and services that will help your customers? And how are you finding out what those things should be in terms of leadership? What kind of training do you have in place to help lead the team? And what are you doing to develop the people who are not yet leaders into leaders, to support the people who are leaders and then to get the two of them to talk. What are you doing in terms of quality management? TQM is totally total quality management. So what are you doing to actually have quality controls to be sure that the ads that you send out communicate the proper messaging and that the links go to the right places and that the products are going to the right people and that the people that are receiving the products or services are happy with those? How are you managing those processes? What are your systems like in your business? How well do you have systematization so that there is a way that is documented of doing something and then how confident are you in the structure of your business? And I love the capability assessment for doing this. I would love for you to do this for yourself as one of your homework assignments. To just take this blank capability assessment and, you know, our target really should be 10. It can be less if you're in a, you know, in a sprint to get to a certain level. But ideally, what is the target for you in each of these areas and how are you right now? That will really help because you'll probably see, like, here we're real strong in people, as you can see, but we're pretty weak. It's like we're kind of lopsided. We're good with people, communication, culture, customer experience. But then when we get to the KPIs, we start to fall down. And innovation, we're starting to fall down, and our systems are not as strong as they should be. And we could definitely work on our culture here. So we can see that there are some real opportunities within this radar graph to be able to improve these areas. So I just think it's a good way to get a pulse for where you are in these really, really important areas. Now, when we talk about structure, there are different ways to do it. One way is to look at the three places that value typically sits in the company. It either might be by profit center, and this would mean that you would want to have a structure that was focused on isolating and protecting profit centers. Or you might want to do it based on assets so that you're actually saying, okay, I'm going to have my assets that are tangible, the ones I can actually touch and put my fingers on in one place. And then I might want to have my intangible assets like my intellectual property, copyrights, trademarks, patents, trade secrets, all that kind of stuff sitting in another place. So you could actually have a structure that focuses on these three things and say, I'm really going to have effectively an entity that's going to hold all of my tangible assets, an entity that's going to hold all of my intangible assets, and then an entity that is going to be either holding all of my profit centers, or ideally a separate entity for each profit center. So as a recovering attorney, and we're not giving legal, accounting or medical advice here today, but it is important to think about continuity with your business. And there's a lot of things that can happen in a business that can create liability. So if you can protect the most valuable parts of your business so that if one part of your business experiences liabilities, it doesn't sink the whole ship, that can be a really good thing. So thinking about structuring by where the value sits in the business is a really great strategy. When you're thinking about structuring. So if you have all your intellectual property in one company and that company is licensing it to the operating companies, if something happens to the operating company, then the company that's doing that's got the intellectual property doesn't lose the intellectual property ownership to somebody that would be having a claim. So I'll give you a great example in this. And this also inadvertently can lead to the ability to have multiple exits, which we'll talk about in a little bit as well. So I used to own a motorcycle helmet manufacturing business with a friend of mine, and we manufactured for all the major motorcycle helmet companies. We were the ones that actually created the helmets, and then we private labeled for them. And we also had our own brand. And what happened was that people would have an accident, a rider would have an accident, and then the attorneys would look at every bit of clothing and every bit of gear, including the motorcycle that the cyclist was wearing, and they would sue everybody, just make a list of everything that they've got, the gloves, the jacket, the helmet, the bike, everything, and sue everybody. And so we, the product liability insurance would get crazy high. And they, what we did find also was that if you had a very, very high product liability insurance policy, then they would sue and the company would settle at a standard rate. And that was, you know, that, that was just kind of how that business works. It's kind of sad to me, you know, that that's how our system works, but it is. And so what we thought about was, rather than putting our brand at risk, let's put our brand in a licensing company and then let's license a manufacturing company that we also own to make the stuff so that the manufacturers, if there was a defect in manufacturing, then that company would be liable and maybe they'd get a giant judgment against that company that was beyond what insurance would cover. And that company would die. But the brand wouldn't die. The brand sat in a separate entity. The brand sat in the intangible licensing company. So if the operating company that was manufacturing went under and wasn't able to pay its minimum license royalties to the company that owned the ip, then the IP company canceled the contract and simply licensed it to a new manufacturing company that we owned. Right. So that was a really effective way to protect that. And then we started doing that with our tangible assets to the equipment that was used to manufacture was owned by a separate company than the company that was actually operating and engaging in the sale of the helmet. So the liability would sit in the profit center, not with the tangible asset company and not with the intangible asset company. And we split tangible and intangible just to provide an additional level of protection. So this might be more than you need right now, but if you are moving into high sevens, eights, nines, ten figures, then you definitely want to think about things like this because they're going to become really, really important. Now, the cool thing about doing this was that when we sold that company, the people that bought it, who were very sophisticated, actually bought the profit center but didn't care. They did their due diligence and they saw the licenses and all that. They didn't care that it didn't own the actual IP at the time, the brand. When they then later went to sell it to a significantly bigger company, that company did care. And so they came back and we ended up getting more for the intangible license company than we did for the operating company. So it was kind of really interesting. So I learned there's the ability to do kind of a double tap on sales there. And so that's that. That's a thing to think about, is structuring your business by the value catch. The other thing to think about is maybe structuring with an eye towards the objective that you want to achieve. And there are different objectives. There's eight of them, really, that are primary that we want to think about. The first is, is there a jurisdiction that has more favorable laws? So for example, a lot of companies are incorporated in Delaware when they're public companies because Delaware has laws that are very favorable to management and not very favorable to shareholders. So if you're going to take a company public, you like Delaware, because Delaware is going to be very, very pro management. And if you get diluted to having a minority interest in your company, then the public people don't have nearly as much to say about how you're going to run the company. And if they try to throw you out, there's more favorable laws for you and all kinds of other things. So, you know, you want to get a little bit familiar with the laws or at least have a good attorney that can tell you. The next would be, if you're going to get funding for your business, at any point, you're going to be way better off with a corporation than an LLC or a limited partnership or some other kind of entity. So you want your entity to be funding friendly as well. And when I came into the business with Ryan Deiss and Richard Lindner and Perry Belcher, it was a limited partnership. Some horrible Advice, in my opinion that they got from an attorney was they should do their business as a limited partnership. And, and limited partnerships are not funding friendly at all. So they're funding friendly if you are making an offer to do a syndication. But when you're talking about getting funding from banks and things like that, they're definitely not friendly. So that's the thing to think about, limiting liability. Different types of business entities have different levels of liability that they'll protect you from. So that's something that you're going to want to take a look at as well. And what about your ability to maintain control? How you create the documents in your company can be the difference between you being Phil Knight at Nike, who owned his business until he decided he didn't want to have control and I think he still has control. Or Chip Wilson who founded Lululemon, who got tossed out because he didn't have control. Right. So there's definitely some, some importance in your ability to maintain control of your business. Also from a tax standpoint, there's a lot of different things in terms of the entity and the places they're located that can save you as much as 50% on your taxes. Geodiversity. So do you want to have different companies that are segregated by their geographical location? That might be by different market shares, it might be by country. There's a lot of places to think about that. What about in preparing for sale? Because different entities like corporations have some very, very favorable characteristics that will allow you to exit and not pay taxes on 10 million of your gain. Right. Under section 1202. So there's a lot of different things like that. There might be the possibility to do different types of reorganization where you actually sell the company and receive public shares in a public company and you can margin those shares and get money from them, but not pay any taxes on the gain. There's a whole lot of opportunity there. And then the ability to have different cap tables. So cap table or the capitalization table is who owns how much of each part of the company and we have the ability with everything. This is a recurring theme to me, like in life and this is a model I didn't talk about. But the ability to fractionalize and thin slice anything can be ridiculously valuable. The first time I ever heard about it was when Donald Trump acquired the air rights to the Tiffany building in New York and, and built Trump Tower and sold. He acquired basically just prime New York City space and say whatever you want to say about him. That was a great move and maybe it was him and maybe it was an advisor. I don't care about any of that. But whoever thought of that, it was absolutely brilliant. It's like there's airspace over a store. Nobody ever really thought of buying that before. Now they do. Right? So you want to think about the ability to fractionalize different things in land, in real estate. We say in the law there's the right of everything to do with real estate. That's called a fee simple interest. And they say that's like a bundle of sticks. It's like that, that fee simple, that main huge right that you typically get when you buy your house is all of the rights. But you can parcel that out and divide it up. You could sell water rights, they're called riparian rights. You can sell mineral rights to the oil that might be under the ground that you've got. You can sell air rights to the ability to do things over top of it, like Tiffany's did. You can sell all kind of rights with real estate. You can do it with companies too. You can say, well, there are different rights within a company and they're different rights within each product that we've got. And there's different rights that we can do with ownership of the company. So that ability to fractionalize and thin slice and then do different things with the thin slices is one of the most creative and overlooked things that you can do in business.

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