The Goose and Egg Strategy for Selling Your Business | Creating an Exitable Business (Part 3)

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Okay, well with that I'm excited because this in particular is something that I think really gets overlooked and that 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 in 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. So when we're thinking about entity choices, and I'm going to talk a little bit about the us, I'm going to talk a little bit about the UK and the EU and then a little bit about Australia with these, just because I know we have a diverse audience. But all I've done here, it's the value caches that I mentioned. So profit center, tangible assets, intangible assets. And then I set intellectual property out. Intellectual property is a type of intangible asset, but there are intangible assets like accounts receivable and things like that. So you may decide that you want to have all those in one company and call it IP or you may want to have separate things or you may want to just have them in the profit center. But these are the four primary value caches in the business. And then the objectives are the eight objectives that we talked about. The limit, liability, cap table, save taxes, laws, geo, funding, control and prep. And then all I did was I said here in the United States there are really four primary entities. There's one called a sole proprietorship, which is a single owner. There is no entity there though. That's just you. I would strongly, strongly, strongly recommend that you do not do that. You will, if you're doing that, you'll report your taxes on a schedule C and those are much, much more likely to be audited. And it's just, it's just really hard to sell a proprietorship. So, so I'm only talking about corporations. There are two types here, subchapter S and subchapter C. There's some others that are nonprofit and things like that. The primary are C and S. C is generally going to be the most favorable for everything that we're talking about doing in terms of funding and cap table without getting complex about it, prepping for sale, that kind of stuff. It also gives you more flexibility in how you plan your taxes and it also generally will result in lower taxes because currently the corporate tax rates are significantly lower than the individual tax rates and S corporations are passed through. There's also limited liability companies. LP stands for limited partnership, LLP stands for limited liability partnership. So those are the four most common entities. And so all I did was basically say in each category what type of entity fits for the different cap table, for example, across the board, in each of the value caches, a corporation is going to be more preferable. But in terms of limiting liability, corporations and LLCs and limited liability companies and partnerships, all are relatively equal, same thing in terms of maintaining control. So you can just get an idea of what's the most important thing to you in terms of your objective and then how does this apply to each profit center and then which entity would be most appropriate for you? Then with respect to the UK and eu, there's PLC ltd, eclbs, llp, all of those different types of entities. And we do the same analysis there. And you can see that generally the PLC is going to be the easiest to do most things. 95% of UK companies are the these types of companies. Then in Australia we've got pty. So we can kind of see that PTY is nice and probably the most common, but in terms of paperwork and expense, it's a little bit more expensive. It's not really bad. It's so I've got it as a. As a tick, but it's not that it's not that bad. I think that's really the entity most people are going to choose. Sole Trader, to me is the worst because it gives you the least amount, gives you no limited liability protection, it gives you not really great tax benefits. And even though it's easy and doesn't require paperwork so much to set up, the upside is significantly outweighed by the downside. So now I want to kind of give you a couple of ways that companies evolve. So one company might end up spawning a whole lot more. And a great example was our native Commerce holding company. So we had a company called Survival Life to start, and then we said, well, our Survival Life customers actually are very interested in DIY projects. So we created a new company and said, let's send people who are interested in DIY projects from Survival Life's company to diy. And then we said, well, both of those people turns out the DIY people and believe it or not, the Survival people are interested in making their own makeup. So we created a company called and bought the domain called Makeup Tutorials. And then we fed that from those two companies and then from those three companies, Survival Life, DIY and Makeup, we found that a lot of people were interested in homemade products. So we started a brand called Homemade and so on and so forth and basically ended up with all of these different companies. So we created a holding company to hold them. After we had two of them, we had Survival Life and DIY projects and we were like, let's put these in a company called Rival Media Group. So all of that went into Rival Media Group as a holding company underneath another holding company called Native Commerce. And then we said, well, we should do distribution. So we created a company called Wholesale Distributors. And Wholesale Distributors is a distribution company that sold all of our company, excuse me, that was the Pick Pack and ship and 3 PL company for all of our brands. And then we had Forward Face sales company for retail as well. So we basically had effectively manufacturing, distribution and retail all falling under one, but all emanating from that one company that we started with at Survival Life. So just like that kind of gives you an idea of kind of how companies can grow. And when we're thinking now about things, we think about how many exits might we be able to get from the companies we've got. So when I look at going into a new thing now, I'm looking at is there the opportunity to exit this company? But more importantly to me now, if I'm going to put time in this because my time is limited, am I going to have multiple opportunities to exit? So we had a holding company called Idea Incubator, that was the holding company and we could have sold that at any given time and sold everything that it owned. But it had six major operating units. Rival Media, Wholesale Distributor, Digital Marketer, Traffic Conversion, Summit Event, War Room, Mastermind, and Platter, which is a content agency. So those major operating units could each be sold as well. And then each company, as you saw, Rival media had about 20 companies under it. So each of those companies had each of those major operating units was a holding company unto itself. Right. So what's cool about this is that means we could sell one company and somebody buys everything. That's actually unlikely in this case because we were doing so many different things. But the six major operating units definitely provided an opportunity to sell each of them. Or we could sell all of them. But the selling all of them really, because they were all at different points of evolution. We're looking at Idea Incubator as a company that would hold all of these companies, and then when each one got to a maturity level, it would sell. So rather than selling Idea Incubator, we really were thinking about having the six exits that we had in these major operating areas. But we realized that, that under each of those entities there was the ability to have several exits as well. And so what this does is it gives us the ability to exit a whole bunch of companies at once or one part of a company at once. And so the way that that kind of worked out was with Digital Marketer. Digital Marketer originally owned tnc. So we spun out TNC when we sold it to Blackstone back in 2018. Subsequently, we also sold Content and Commerce and Digital Agency Growth Summit. So those were three exits that got spawned out of one holding company. Later we sold Praxio, the software company, and True Conversion, the software company. So now we've sold five out of six of the original companies that we had in Digital Marketer. We've acquired several more now. And Digital Marketer gets constant inquiries from people to buy it for its core business as well. So this structure of having multiple entities really allows you to have the ability to have multiple exits. And here's what's cool. The valuation of an event, those three events that we sold, that valuation is different than the valuation for software. The valuation for software is significantly higher and it's based on revenue instead of EBITDA or profit. So you can, by isolating the things that you've got into separate entities, and it gives you the ability to quickly and easily have an interest in that from a third party, like a private equity company or another company, then go through due diligence. All of the stuff is separate. It's in a separate entity. It's got separate documents, it's got everything in place. And then you can sell them much, much more easily and get the best rates for them. So that's something to think about. And from that original diagram, we've sold Platter, we've sold Wholesale Distributor, we've sold Rival Media and all the companies under it. We sold True Conversion, Digital Agency, Praxio, TNC and Cont and Commerce. And we have minority interests in a couple of these. But that's kind of fun, right? So we've had all these exits just out of one group of companies. All of this grew out of the first company that these guys had, right? So that's, that's really, really fun. Now what I like to call this is the goose and eggs structure, so that we're going to sell all the eggs and we're going to keep the geese. So this is the way it looks. You've got you and your entity that's going to hold. So ideally you've got some estate planning in place. If you don't, definitely go to an attorney and get it. If you need a referral, we can give you a referral, and we don't get anything for that. But whether you've got a trust or a family limited partnership or a family limited liability company or a corporation, you ideally not individually, but through whatever your estate planning entity or tax planning entity is, you're going to own an interest in the operating company. You may or may not have additional partners, and then you may or may not have investors as well. But ultimately you and your partners and your investor group are going to have an interest in that primary holding company that you've got right now. That primary holding company is going to allow you to spin off multiple operating companies. I'm going to encourage you to have that holding company even if you only have one operating company right now, because this will ultimately, as you grow, make your life significantly easier. So right now you might have you no partners and no investors, the holding company and your operating company and nothing else. Well, pretty quickly you're going to want to think about having a share co or bpo, which is a business process outsourcing company that you create that has any services that you're going to share among the different operating companies that you've got. So, so this might mean that it would be separate media properties. It might be your accounting and finance team, your sales team, your marketing team, your media buyers, your employment company, so that you have just one payroll with one benefits as opposed to a whole bunch of different ones. But you're ultimately probably going to find that you want to have a share co or a BPO to do that. And then as I mentioned, you're probably going to want to separate your intellectual property out and have that in a separate company as well. Now, if you elect also, I didn't want this to get terribly complicated. So if you also separate out different intangibles or tangible into a different company, you can do that as well. And there'd be more boxes on here, but I was trying to keep it as simple as I could to get the point across. But the point is now that your holding company owns your intellectual property company, it owns the operating company, and it owns the company that is the shared services or BPO company. Okay? Now, when you decide that you want to do something else, maybe you decide that you want to do a license deal and you're going to license some of your intellectual property to a third party to do a product line. And that case, then you've got the intellectual property company contracting with a new co, and that's a separate entity and that holds the license. Maybe your primary operating company has something to do with it too. But the really cool thing here is that you can have a completely different cap table that is funding this company than the cap table of you, your partners and your investor group in the original holding company. So what's nice about this, and this is like a mistake that people make over and over and over, is that they'll basically go out to investors and they'll already have a successful company that's operating and they want to do this new thing. And the new thing costs a million dollars. And. And so they go out to these investors and say, we need to raise a million dollars in our current operating company so we can do this new thing. And the investors are like, great. Your performance in the old company is what's going to drive this. And we like the idea of the new thing. We're thrilled. We're going to put a million bucks in and we're going to have an ownership interest in both your original company and the new company. Well, the new company may or may not be successful, so why not instead have that be a separate company that is funded in a different way than the first company? So that when you're giving an interest to those investors, you're giving them a little bit bigger interest in this new company. But your risk in the new company is so much greater than your risk in the old company. Why give away the equity in your old company when you don't have to? So by doing separate entities for the new projects that you want to do, you can have separate cap tables for them. And I think that's really, really cool. Maybe you want to go into a new geographic territory. Well, who should benefit from the new geographic territory? Maybe you've got a comp plan that's set up for all of your employees in the original business, but they don't have anything to do with the new territory and you don't want to fund the new territory. Well, you can do a new cap table where maybe other people, other employees, other partners have ownership interests in the new Geo and there's just a straight license deal. Or maybe you're adding some sort of services to what you've got. And again, the services company can have a separate cap table from the original Cap table. So it's really, really a wonderful way for you to structure things that give you the ability to have multiple cap tables, multiple funding sources, without giving up any of the equity in your original company, you can have new debt structures in the operating companies that are not going to create liability for your original company. You can motivate and incentivize the employees in new cos in the new operating companies without giving up equity or profit share from the original company. And you cannot distract the people that are in your original company from what they're already doing by giving them too many other projects to do, all while protecting your intellectual property in a separate ownership entity and having the benefit of things that can be shared, like the media team or the sales team or whatever, without having to have multiple payrolls. So this is really a fantastic structure, just from an operational standpoint. But now when we get to a sales standpoint, if you then build up something really cool in that new geography and OPS number three there, then that company itself can be sold and you still have all of the other companies until you decide you want to sell them. Better still. And the reason that we call it the goose and egg structure is that the goose that keeps laying these golden eggs. If you think of Ops 2, Ops 3 and Ops 4 as eggs and you think of the holding company, the intellectual property company and the share company as the goose, you have media in the share company and teams that can be used for any number of other companies. And you can continue to sell off those other companies while retaining the teams and media and in the original company. The truth is that most buyers are going to let a lot of the team go anyway, particularly management. The truth is that they're probably not going to understand the media and don't value it like they should. But that means why sell it to them, right? So I love using the example of Traffic and Conversion Summit, because when we sold Traffic and Conversion Summit, we spun it out of Digital Marketer. So it became like an OPS2 there, right? And so it was owned there. It only had the. When it sold, it only had the recordings from the prior events, the name and trademark of the event, the URL trafficandconversionsummit.com and that was it. That was it, Right? We didn't lose any team. The media that we built Traffic and Conversion Summit with was called Digital Marketer. And so when we were negotiating the sale, they actually did an analysis and said, should we buy digital marketer 2? And we said we would be happy to sell it. It's A whole different deal. And it's valued differently because it's got mrr. But if you, you know, if you're interested in it, we would love to talk about it. And they ultimately said it would be nice to buy, but we don't need to buy it, so we won't. And so we kept 100% of that media and then we just pointed it at other things like software companies and like Scalable, one of our new companies or Epic, another one of our new companies. And then all of that was retained. We didn't lose it, they didn't care. It didn't change the purchase price or the valuation structure of what we were selling to them. So it's really doing. The goose and eggs thing has so many benefits from cap tables to exitability to severability to. This is part of that fractionalized thing too, right? We're slicing up different value segments of the company and putting them in separate entities. And that gives us this maximum kind of flexibility. And more important than any of that is we get to retain our momentum because we don't have to go out and hire a new team, we don't have to build a new brand. We've got all of that and we hold onto that and we just create new products and service companies to sell off.

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