Tax and Deal Structure Q&A

We just want to give a quick reminder that this podcast is not intended to be legal tax, accounting or other professional advice. And we encourage you to seek the advice of a professional before making any decisions. 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 Fraser and Ryan Deiss. So a couple of things there. There's a lot of strategies from a tax standpoint that you can do. So in flipping, somebody asked about what if you flip. So that's if you acquire something and then sell it for more. It depends on how you structure those deals. But there is a lot of opportunity with reorganizations. Tax free reorganizations, where you can effectively defer taxes for an indefinite period of time. When you acquire and sell, there are options where you might acquire a company and then flip it to an esop, which would be an employee stock ownership plan, in which case you can receive income over a long period of time from the company with no taxes because the ESOP doesn't pay taxes. So there's a lot of opportunities planning. You can even do that and then flip. You can even flip the company into an ESOP and then take the tax free part as part of the of the sale and take the rest. The second part that you were going to get the second bite of the apple later and put that in a Roth IRA and then never pay taxes on it. So it's like. And the value of the company after you do an ESOP is almost nothing because there's a big note that, that the company owes to you and you get that money out tax free and the company is now worth a lot less because it's got this giant note. So then the remaining part of the company that you kept goes into a Roth and then when you sell that, there's no taxes at all. So like I don't go into that stuff because it's fairly complicated to follow. But I will show you. Like when we do a consult with somebody about structure, particularly structure, we talk about a lot of that stuff. And I have any of you guys had an occasion to use the structure consult yet? Okay. So that's basically when somebody says what could we do to just look at the overall structure of the company and be sure that it's tax efficient and also have it planned ideally for an exit. And so we'll go in and we'll start with the goose and eggs thing. How many people are Familiar with goose and eggs. Okay, a few of you. So goose and eggs is where we set up different entities to take different parts of the value of the company that we think might be exitable versus those that somebody wouldn't want on an exit. And we carve those sections out. There's a diagram of it in the portal. So what we'll do is we'll say, okay, there's a holding company and then we will take the operations and put that in a separate company and that becomes a bpo, a business process outsourcing company where all of the shared services is for multiple businesses. So the reason that we don't go terribly into that is that it can get complex, but it's all very simple because basically all this is, is showing ownership and then a holding company that has multiple operating units, and then there's different ownerships under different cap tables under those different operating units. Right. And so that's a really cool consult to do if you, you know, when, when you get comfortable with that. And we do have that in the portal. So this structuring can be done anytime prior to exit, or does it need to be done from. Yeah, anytime prior to exit. Okay. That's what's cool about it. Right. And so, so we'll find out first how do we make the company exit ready. So how do we structure the company so that the only thing that we're selling, we position the company in advance, ideally, because once you get into due diligence and the other side is how to look, it's difficult to carve things out because then they're like, well, we want that too, but they probably don't. Right. So there's so many times that we've seen, particularly a private equity company or a family office or a public company come in as a strategic buyer and they buy the company and then they just let most everything go except the one thing that they wanted. So what we try to do in advance is say, let's carve out the things that we think buyers might want. And then when we go into the negotiations, it's already set up that way, so we don't have to say, oh, well, if you don't really want that. Like with Digital Marketer and Traffic and Conversion Summit, we had a sponsorship company, a personnel event company, a media company, and the event, the only thing that the buyer wanted to buy was the event. They bought literally a trademark, a website and a customer list and some old recordings. That's it. For a whole lot of money. They did not buy the media Company. They even hired a firm to do an analysis for a few hundred grand on whether they should buy Digital Marketer with it or not. Well, Digital Marketer is the company that feeds traffic and Conversion Summit, right? So then they realize now we're five years out of that exit, right? They realize, you know, we probably should have bought the company that put all the people in too. Can we buy that? And we were like, absolutely, you know, but it's a whole separate deal. And so like that's that had we just had TNC in that company, it would have been, well, it's already in there, so we want that too. And they would have screwed it up. And with all respect, I mean, I love those guys. And we just renewed our contract with them to run TNC for them, right? But they would have screwed it up because it's not their core business. They're an events company, right? And we just watched this with one of our friends who sold his photography education business to a SaaS because they were like, we should probably acquire media. If we had this educational company that's doing about two and a half million dollars in profit and all of these thousands of photographers, we probably could sell our photography SaaS to them. So that'd be a good thing. And it would have been, except that they didn't know how to run a company like that. Because Cole was very entrepreneurial and very aggressive in his marketing and very salesy. That's something you hear a lot of people that are not good at marketing say. It's too salesy. How if it's selling and it's supposed to sell, how can it be too salesy if it works, right? So they bought the company and then they put a 28 year old recent MBA marketing graduate in charge of him. His salary went from 2.5 million a year to 120,000 a year for three years because that they wanted him to stay. He absolutely hated life because now he's reporting to somebody in a corporate environment that knows absolutely nothing practical, but all of the theory of how to market, right? And he's like, well, we need to do this. And they're like, no, it's too salesy. We don't like that. You don't want to sell. Yeah, no, that's too salesy. What does that mean? Right? So then a few years go by, the company drops to about 600,000 in revenue. But Cole, we did the deal for him. He got $8 million, excuse me, got $7 million in cash and $8 million in stock in the new company. So a couple of weeks ago they were like, you know, we didn't really know how to run that company, as it turns out. And it's just kind of sitting there. So we're going to get rid of it. So he bought it back, he kept all of the money. Right. He did give back his stock that he had, which was worthless now because that company is about to tank and he did have to pay $275,000 to buy that company back. Right. That happens over and over and over. And so this structure stuff is really, really important. And if you do it in advance, you can keep a whole lot of things that have value to other people that you would otherwise have given up. And so whenever I go in right off the bat, like especially to a deal that I have equity in or that I've done another kind of consultation, then the first thing is gonna be, what is the goose and eggs layout? How do we separate the different things that are likely to have value and position for only selling the things that a particular buyer would want? Right. Then the second thing is the tax structuring, because almost always like this person lives in California and owns everything as an individual, so is subject to 50%, roughly taxes on everything that the company earns. And that company's earning about four and a half million dollars in profit right now every year. Right. So what's interesting though is it has operations in five different states and only about 40% of its operations are in California, yet it's pulling all of the. And two of those states are tax free states. So it's pulling all of the income because it's set up as an llc. Right. All of the income from the tax free states is pulled into California so that you can then pay taxes on it at 13 plus percent plus the individual rate. So by rearranging that, we were instantly able to save about $2 million a year. Now when you're trying to justify your equity in a company, which I was offered at the end of that consult, Right. When you're trying to justify that or sell the value, it's pretty easy when right off the bat you save somebody $1 million a year. Right. And then that helps the negotiation. Right? So think about that exit stuff when you. And structure when you're going in and doing these deals, even for yourself. And then the other thing that I'll say is, I'm not sure how much Grant touched on it, but if you acquire something, I don't own any of my companies individually. They're all owned through a series of c corporations at the top because I want to control what taxes pass through because I happen to live in California, right? So I pay myself everything I need to to live the way that I want to live. But keep in mind that especially these days, everything is an investment. Sneakers are an investment. Watches are an investment. Wine is an investment. Your trip to France for three weeks to research places that you're going to hold your next event is a cost of business. There's very little that you would need to take out of the company to potentially even get to the point where you're going to talk about the double taxation, right? You would leave pretty much everything in the company. And I buy and sell watches, and I buy and sell sneakers, and I buy and sell wine, and I buy and sell property, houses. The house we live in is owned by a company. We pay rent to it, right? Provides asset protection. But also all the money that's there is pre tax. Well, it's not pretax, but it was taxed at 21% in the corporate structure, right? So there's very little that you actually would ever need from the company. And certainly it's like even up to a million or 2 million bucks to take as a salary for the amount you need to live on. Excuse me, that's a deduction, right? So only an idiot would choose to take a dividend. Like you get to decide you own the company. So why on earth would you ever say I'm going to take the money out as a dividend? That the biggest red herring in finance to me and tax is there's double taxation on companies because you'll have to pay taxes as a dividend. Who would do that, right? The accountants that tell me that I'm like, why would I ever do that? How would you get around that? You know? And if they're like, well, I don't know, it's double taxation, you're an idiot and I'm not going to hire you, right? Because that's not anything anybody with any sense would ever do. So just think about that, right? Like that whole tax structure thing can completely pay for your consult into the equity in the company. And there's a whole lot of creative ways to get out that we won't cover here unless you want to do it, you know, the last part of day two of today. But I just want to kind of put that in your head that, like, don't let the double taxation fairies scare you away from having a corporate structure because it's just. That's a red herring, right? And there's so many ways you can structure that. Yeah, I like this structure console concept. How do we get into that position with a company to actually offer that? I mean, to me it's all in conversation. So when, when I talk to people about working with them, when I'm just having conversations and they're. That we'll have a conversation about, can I get your advice? Can I pick your brain? All the things that people say that turn into consults, but to me it's just so some of the things that I might be able to help you with are the way that your business is structured. Chances are you're probably paying way too much in taxes. Chances are what I see a whole lot of the times is that people have not properly separated the value propositions and the profit centers of their company into things that make sense for people who are potential buyers. Your company might be too complex as it's set up right now to appeal to a buyer. So one of the cool things we can do is look at the structure of your company and simplify it in a way that'll make it more appealing to a buyer. Simpler and less expensive to do due diligence on and more tax efficient for you is that if that's something that sounds like it would be interesting to you, I'd be happy to sit down with you and help you work through that. Pretty straightforward, Sean. So you were saying that when you sold tnc, you said first you said carve out everything and then sell only that what you wanted. Yep. But then you said there is DM and TNC involved. So did you show them all five components? Yeah. So when they do diligence, they'll see the contracts between the related companies. But your game plan as you were going in, your game plan before you went in was just the event. Exactly. Okay. Yeah. And that's all they wanted to buy. Right, Right. Right. So. So thank God they don't care. Yeah. And one of, one of my favorite stories that Grant and I did when we were practicing law together was structuring intellectual property in separate companies. So we'll take the IP and put it in a separate company, particularly if it is a liability prone industry. So we had a deal with a, with a client where we had part of a company that was a motorcycle helmet manufacturing company. They got sued all the time. Right. Because the, like, if somebody has a motorcycle accident, everyone gets sued. What helmet were they wearing? What gloves were they wearing? You know, what gas did they use in the. Get it. All of that. Everybody that's just what attorneys do. So, so what we did was we took the intellectual property and we had the intellectual property in a foreign company because it was a company that was doing business internationally and domestically. And we licensed the intellectual property to the domestic company. So when the lawyers came a knocking on the product liability suit, we were like, well, you can sue the company, but the company has no money and it has an obligation for all of the things it sells to pay a license agreement to be able to use the name, which is what sells the motorcycle helmets. So you're welcome to come after that company, but it will probably, if it gets into financial distress, not be able to make its license payments, which will entitle the holding company that has the IP to cancel the contract and it'll relicense to another manufacturing company. But we'd be happy to settle for $10,000. Right. And that settled, I don't know, like maybe 30, 40 lawsuits just with that. Right. And then the third, the really, that was why it was structured that way. But then the happy accident that was a big learning for me was when we went to sell the company to kkr, which is a big leverage buyout firm. It was, they bought the company and all of the contracts, the IP license contracts were there, closed the deal and then they went and sold it to, I think it was like three years later to a significantly bigger company for a significantly larger amount. But that company said, well, but you don't own the ip. And so they came back and they were like, hey, you know, we didn't get the IP when we bought that. We know we have the license and everything, so it's really of no value to you because we have the license. We were like, well, it seems like it might be some value to us. And so we ended up selling the IP to them to help them close their deal for more than we sold the other company to them for. Yeah. So now we like separating the IP as well. So those are really cool, fun things that you get as you're, you know, as you learn. And a lot of them are happy accidents like that one was because then you get liability protection, plus you only sell the assets that they want, plus you might get another body bite at the apple. And there's nothing like secretive or, you know, unethical about doing that. Cause everything is on the table. They send a full blown, you know, bunch of adult accountants and attorneys in to do their due diligence. They're like, yep, it's got license agreements. Cool. And that's happened multiple times now. So that's kind of a cool strategy. Does the licensing just not come up in terms of, like, we also want that company? It totally comes up. But think about. And. And it would be if. If Grant or I were doing the due diligence too. Now, because we've seen this happen, we might raise that issue. But all that's gonna come up is, okay, they've got a logo and a brand. Do they own that?

No, they don't.

Okay, they've licensed it. Are all the contracts in place for the license that allow them to do what they want? Yep. Okay, cool. Check. Right. I mean, that's not something that would be a standard on any due diligence list. It might be for us, because we've lived through that. We'd be like, hey, you know, this is just license. Are you cool with that? But again, they'd probably say, yeah, because they don't. They're not thinking about, is that going to be a problem in the future? Right? It might not be, but if it is, we've got some extra things that we might be able to sell and we're setting it up primarily, again, the business purpose we're setting up for isn't to screw some buyer over. It's. Maybe you don't care about that. Maybe it's only licensed in one class. And it's licensed in the class for motorcycle helmets, but it's not licensed for other clothing or equipment or other trademark classes. So it's got a license. It's got a trademark or a brand name that is protected across multiple classes, but only one class is licensed to that company. And then we still have the ability to sell the rights or license the rights to other companies. Because as you guys probably know, there are companies like Virgin. Branson's a master of that. Right? There's. There's airlines and there's hotels and there's casinos, and, you know, there was a cola for a few months and all kinds of other things. Right. There's so many Virgin that that brand is so valuable. And many brands these days are across so many things beyond the primary thing that somebody would be buying. And that buyer probably doesn't care about those other things. They certainly don't care about them usually at the time that the deal is happening. Right. Because they are only thinking, oh, it's a motorcycle helmet company. Do they have it in the class for motorcycle? Yeah, they do. Okay, great. Check, Check. Right. So it's kind of interesting. Got it. Thanks. Yep. You're welcome. Okay, we'll do one more. You Talked about creating a subsidiary to handle the liability aspect of it. Is it a realistic scenario though, for the subsidiary to get sued? For them to figure out the subsidiary has nothing and has no money and it's, it's, that's licensing this and then to simply then go after the parent company, because you own that too well, but you can own lots of things. The question is, where does the liability get created? So does the liability get created, the liability? To sue someone, you have to have a cause of action. So in a tort claim, there has to be a duty, a breach of the duty, a causation argument, and damages that result from that. So now we say who committed the tort, the act that creates the potential liability? Is the creation of a brand that is licensed something that creates liability, or is it the manufacturer of the thing that is allegedly defective in some way that caused the person who was using it to be damaged? Where the liability sits, it's a lot harder to climb up that other company. Anybody can sue anybody for anything. Grant is currently preparing lawsuits against all of you, which we're willing to settle. Right. So you can't stop that. But the ability to actually effectively prosecute the claim when there is no bad or negligent act is pretty tough. And so that's where that stands up. But by the way, you're going to be doing that in a different jurisdiction that has significantly less favorable laws than the United States because that company is not located in the United States. Right. So it's additional hurdles. To me, it's all about you position to settle for cost of litigation. You just don't create any liability that would crush the company because a lot of it would. And trials are expensive. Just the trial can kill you. So if you don't have insurance defense coverage under your contract, you know, under your insurance contract, it can. Just a few of those lawsuits can wipe you out. Does that make sense? Yeah. Yeah, it does. Cool. Okay, great.

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