The Goose and Egg Structure For Selling Your Business with Roland Frasier and Ryan Deiss

It created a lot of people that was an audience that might want to buy software or might want to buy e commerce products or might want to listen to a podcast. And we never sold the goose that kept laying those eggs.

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. Welcome to another episode of Business Lunch and today's a snackable episode with Roland where he's going to get into some more tactical strategies that you can start using to live a rich and happy life. If this is the first snackable episode you're hearing, I'd encourage you to go back and listen to some of the other episodes that Roland has put out. And if you want to get notified every time we release a new episode, go to the new businesslunchpodcast.com website and we'll send you detailed notes along with every episode. That's businesslunchpodcast.com www.businesslunchpodcast.com and you can sign up for the free email newsletter where you'll be able to get all the highlights and resources from the episodes.

Hey everybody. Roland Frazier and Ryan Deiss with Business Lunch Podcast here today to talk about some interesting things that you might be talking about with us if you were to sit down and have lunch with us. Ryan, what's happening today in the world?

Yeah, funny enough, I was having, having a little lunch, having a little chit chat with one of our founders board members. The idea of STR came up. This is somebody, I think, like a lot of entrepreneurs who many of us have a lot of different ideas, a lot of different business ideas, business that we want to launch within our own business, things like that. And so we were talking about structuring and I asked, I was like, so, well, you've heard about kind of a goose and eggs structure before, right? Like, nope, what's goose and eggs? I was like, oh my gosh, this is crazy, Roland. I talk about goose and eggs all the time. And he's like, never heard of it. And so I figure if one of our founders board members hasn't heard about goose and eggs and probably means some other folks haven't either. And I was looking, we haven't talked about goose and eggs structuring either. So it seemed like it only makes sense to do an episode talking about goose and egg structure. So before I say anything else, I would just kick it back to you, Roland, what the heck do we mean by a goose and eggs company structure?

It's a really big, broad topic. For me. It came about as a result of doing lots of acquisitions and sales, but before that, it came about just from simple asset protection planning back in my. In my former life as an attorney. And so the very first thing was like, okay, well, if we've got potential risk from litigation, employee lawsuits, sexual harassment claims, you know, construction defects, product liability, all that kind of stuff, what can we do to isolate the value of the company? And so it starts with saying, where is the value of the company? What is it that we have that's truly the core of our value? Usually you'll find that that is some sort of intellectual property. It's your brand, it's your copyrights, trademarks, or patents, and those can relate to products. It might be the services you provide, but it's usually not. It would be something around the services you provide. Like, you know, in a product world, it could be the recipe for Coke or Kentucky Fried Chicken. You know, it could be an algorithm that you use, like your search algorithm, if you're a Google or somebody like that. You know, it's any of that process or secret sauce that you have. Well, that is really cool because that can typically be isolated in a separate company that's an intellectual property company that then licenses whatever that is to the company that's doing the work. Because the liability that gets created out in the world is seldom from the intellectual property itself. It's almost always from the operations of your business. Your employee is out in your delivery truck and runs over somebody. Your product causes somebody's computer to crash and they lose all their data. You know, the employees sexually harass each other or people out in the world, or vice versa, and management, you know, policies and procedures aren't there to take care of it. And a lot of that stuff can be covered by insurance, but a lot of it cannot. And very often, fighting with insurance companies to get claims covered or get legal defenses can be a pain in the butt too. So all of that led to, you know, what if we just created this goose that lays the golden eggs? This goose in terms of that thing that provides the value. And we isolated and built a wall between any potential liability from operations and that underlying core value, then that's actually a pretty good structure. So basically, at its core, it was, what if we have a company that's got IP and trade secrets in one company and it's got operations in another? Well, that, that was kind of Good from a legal perspective. And that served us well. I mean, we had anything you can imagine happen and defended successfully against it with our clients and our own companies. What about when we sell these companies? What happens there? Well, it kind of would be awkward if we had two companies that were owned by all the different shareholders. So what if we just put those under a holding company? Okay, great. So now we've got a holding company that owns an intellectual property company and an operating company. And then we started saying, well, as we saw people who were buying these companies and as we sold our own companies, it was like, you know what? It turns out that these buyers very often don't want all of the stuff that is available in the company. As a matter of fact, very often they're only after one specific thing. Maybe it's just the income that's being generated by a particular product. And so what they'll do is they'll let go. They'll just let go, meaning that they just stop devoting any resources to it and these things die. They'll let media go, they'll let publications go, they'll let events go, they'll let all of the staff across all of the companies go, or take just a couple key people. And so in doing that, or complete other offerings that they just aren't interested in. So when we saw that, it was like, well, you know what, what if we just didn't sell those things to those buyers because those things have independent value, but we're literally getting zero valuation from the buyer on those things because they don't care. This just recently happened in a deal that, that I closed over the weekend, which was there was intellectual property that was there, that was efficiency based, that the people who I was helping exit their company actually were hired by a company that makes software to speak at all their events and coach people. Because these guys had a better way than the company did of making things happen, which increased profits significantly for the customers of the company. But the buyer that we were selling to didn't care about that stuff at all. They're like, yeah, there's nothing there. So we could just say, well, I guess that's just, we're not going to get anything for it because we were arguing for a couple million dollars of value for it. And they're like, nah, you know, but what that allowed us to do is then say, well, if you don't want that then and you're not going to pay for it, then we're not going to sell it to you. And they were like, yeah, we don't care. Now, it's easier if you had, in advance of that, separated all of those separate value centers out into separate companies because then you don't have to get an agreement to carve them out. But the bottom line is that there are probably multiple value centers in your company. And I'll give you a great example that Ryan and I had, which is with our companies when we've. We've been doing business together for about 10 years now. And during that time we've had an exit of an event that was not a core part of the company that provided training to marketers. We exited a series of e commerce companies that were also not core but owned by the same company and arguably, because they were used for case studies and things like that, a part of the company. We exited a podcast that was also not a core part of the company, but was there to support the company. And Ryan, I think I'm missing one. Oh, and a software company that we, that we acquired and used to build our own software, but ultimately decided it was just not related enough to our company. Now, that means that we've had four different exits, four opportunities to be able to realize value from things in our business as opposed to had when we made that first exit of the event, had we sold the whole company, we would have been paid that one time and had nothing. Nor would we have been able to continue to generate new businesses in that area and use all the assets and most importantly, momentum that we had already developed out in the marketplace. So we basically said, let's have these value centers sliced up. They are the eggs that something has produced. Well, what produced those eggs? Well, it turns out that what produced it really was the media company that we had, that is digital marketer.com and so digitalmarketer.com created a lot of people that was an audience that could be directed at an event. It created a lot of people that was an audience that might want to buy software or might want to buy E commerce products or might want to listen to a podcast. And we never sold the goose that keep kept laying those eggs. Yet each of those eggs was sold. And we still have, I think, about four more eggs to sell in our current basket. But we can create new eggs all the time. So I'm going to shut up for a minute, Ryan, and let you comment. But I think hopefully that gives a fairly understandable background as to what this is.

So if you think about the example, and we've done this a lot of times, but the one that's I think we're the most public about that. People are familiar with that I think we can give is Digital Marketer. So if you think about Digital Marketer, the brand and the media company as the goose, like, what did it. What are some of the eggs that it laid over time? Well, it. It laid a training and certifications company that we still own, right, that is still very closely attached, you know, to Digital Marketer. It laid a licensing and that could even be spun out as a franchise, you know, company that, again, we still own. It laid an egg that is in this. Laying an egg is a good thing. An event traffic and conversion summit, which we sold, right? And so that was a separate event. Now, had that just been a product of Digital Marketer, it would have been much harder to carve out. But we also said we need to create software to support this stuff. So we didn't just have that software internally. We created it as a separate company that actually Digital Marketer had a contract with this company to provide services so that we could exit that. Even one that you didn't mention that we wound up spinning out. We had an events team, an event management team that was originally just a department within Digital Marketer. But we realized, hey, this team could very well be providing this service not just to our internal company, but to others as well. Let's spin it out into its own company. And we had a contract with the events business that when we sold it, the contract went with it. And so this other company was funded for the first couple years by that, by that contract. So what from the outside looking in, was one company, right? One company, one big fat eggless goose was actually a goose with a whole lot of eggs. And our rule is sell the eggs, not the goose. And so the lesson of the goose and eggs thing, and I'd like to get in kind of the process of how to go about, thinking about, okay, what are my potential eggs, right? And then maybe getting into, okay, if I want to implement this strategy, what are some of the steps? But I think it's safe to say step one is just to acknowledge that within any business, there's actually a lot of much smaller little businesses kind of clumped within. And so that's kind of the first step, is it? Not just to think about what are sort of all the businesses. Oh, and by the way, my podcast was the other one that we mentioned, Business Lunch, you know, is. Is a podcast. It's also an egg. And the beautiful thing about, about eggs is sometimes eggs hatch and become geese that hatch more eggs, right? And so media can birth other media which can have other eggs. And that's when you really get into this thing kind of going crazy. But let's keep it simple for now. One goose, multiple eggs. I got my goose, right? And let's say my goose is a brand. I've got a company and let's say we sell a few different products. And maybe I don't consider myself to be a media company because we don't have a podcast or newsletter events or anything, but, but I've got a customer list, I've got a prospect list. So from that perspective, you know, we could be media. So how would I, if I'm, if I'm running this, you know, if I'm running a business like, like that, how would I begin to think about breaking it into its different component eggs?

Well, I think that the easiest first thing is a three company approach, that you've got a holding company that is going to own all of this stuff so that there's common ownership by the key people that you start out with. And then after you do that, it would be very, very, very rare that you would ever let someone else into that holding company. And I'll tell you why as we get into this a little bit more, then you would have a company that you put the intellectual property. You would say, what creates value in this business? Like if I take it all the way back to the core, where is the, the value created? And it should be able to be traced back to some form of intellectual property, whether it's a process, it's a system, it's a series of sops. It's patents, copyrights, trademarks, brands, logos, any of that kind of stuff. Trade secrets, recipes, formulas, algorithms, those things that are, that intellectual property that creates value should go into a separate company. That's the intellectual property company that is owned by the holding company. The operations then should go into an operating company. And that would be where your payroll is paid, where your employees are, where services or products are sold to your end users, customers or clients. And that's the most simple place to start. Now after that, you would take a look at operations and you'd say, what are the value centers? You could call them profit centers or you could call them value centers. But what are the different value centers that we've got? And that might be, well, we have a software and we do these services and we've got a product. Well, great. Then you've got three value centers that might be best presented or structured as three separate companies. Because now let's Take a look at this. Let's say, well, we've got a really amazing product development team in the product thing and we want to reward them. Well, if you also have people in the software thing and the software thing, maybe that's not going as well and they're kind of underperforming. It would be kind of a drag for them to get the benefit through some sort of employee incentive stock option plan or something like that in the product company. It would also kind of be a drag if you raised a round of another $2 million to help continue to support the flailing software company for you to lose or have a dilution in equity in the other profitable things that you've got. So the service business and the product business. So what you can do then is if you have set those up as separate companies, then each of those can have a cap table of its own. A cap table is a capitalization table, meaning who owns the various parts of those companies. You don't raise funds and you don't let employees participate in the holding company. Okay? So in our simple three company structure, where you've got a holding company, you and your founding partners, the intellectual property company and the operating company, the only place you would ever let anybody in would be the operating company. Now, if the operating company gets split into three companies, the software company, product company and service company in our example, and we need money for the software company, then we're not going to raise money at the holding company level. We never ever, ever, ever do that. We're not going to even raise it at some operating company that has some relation to those two companies. We're going to go and within the software company that's a separate company, say we're going to do a safe, a simple agreement for equity or a convertible note or a straight loan, or we're going to sell equity and we're going to have people that are in there working hard that maybe there's a CEO and maybe there's a team and we want to incentivize them with some sort of employee stock compensation that's all going to be constrained and contained in that SaaS company, and then you're not diluting the other. So now when you want to reward the product team for good things, that's got its own cap table and they can participate in that without bleeding over into the loser SaaS company or the we don't know if it's doing good or not yet a service company. Right? And similarly, the people who are in those other companies don't get to benefit from things that they had nothing to do with at all. Similarly, your investors in each of those different things don't get to benefit from the other things because that's not what they signed on for. That would be a wonderful bonus, but you don't have to give that away. And then last but not least, should you decide to sell, let's say, the product company because it's doing so well, then when that sells, you and your partners who are founders as the ultimate holding company receive the lion's share of that. But also your investors who invested in the product company also get to receive the benefit of what they invested in without being diluted by these other investors. So it works really, really well across the board to protect you, to take care of your employees, to take care of your investors, and to segment value across the places that it should be segmented. And assign the return on equity, the return on investment, the ROI to the people who really should actually get that without spreading it to people that shouldn't or diluting your ownership.

Yeah, I mean, there's two very clear benefits to this, to this structure that I know that we've personally experienced. And the first is just when it comes to exit, being able to exit a piece fairly easily as opposed to trying to, you know, exit an entire business or do a carve out, it's just so much simpler. I mean, we ran into this a little bit when we sold Traffic and Conversion Summit. It wasn't yet fully split out into its own egg, but it was in the process of, because we knew this was going to come and so we at least were operating. It had its own P and L. It has, it had its own internal contracts between service companies, our internal events company, like these things were already in place so that when it did come time to sell, we could isolate the value to the buyer. Now, there was some complexity because again, it wasn't completely split out yet. The email list, for example, was still shared. And so we had to figure out, okay, well, what actually belongs over here. And so you don't have to be perfect, but it made it a lot easier from an exit perspective. And in the beginning, you know, when you're selling an event to an events company, they see the value in the event. They didn't see the value in the other parts of the company. They thought the software side was confusing. And, and had it all been one chunk, one, I don't think the deal would have gotten done. And if it did get done, we would have had to give away a Tremendous amount of value at a very low valuation because they don't value it.

Yeah, I was going to say, if I'm adding up in my head, from the sale of the other assets, we have more than doubled what we sold, you know, what we received from the sale of the. That one thing that could have been everything. Plus we still have four exits in us that I think will be multiples of that. So it's kind of crazy.

And we still own the goose.

Yeah, exactly.

You know, and we still own the goose. So it can lay more eggs. It can do more. I mean, we recently sold a podcast that the. Which was an egg that the digital marketer goose had laid. Well, we can go and start more podcasts. And so I think that's. Not only does it make it more exitable and it increases the value of those. Of those exits. But you said something that I think is so incredibly important that I don't want to gloss over, and that is when you spin out a value center into its own entity, it also forces accountability. Because I know we've made the mistake, and I know plenty of entrepreneurs who make the mistake of creating rich uncle scenarios. Do you know, you familiar with the rich uncle scenario? Right. We're going to let this. There's this little kind of side project over here, and it doesn't really have to be accountable today because it's going to keep getting funded by the rich uncle, you know, in other words, you basically let this kind of new pet project suck off of the, you know, the profits of the main thing because you don't spin it out. And I know for us, you know, we talked about the software side of the business and we had, we had not fully spun out this particular egg. And when we did, that's when it became clear, oh, when it's actually forced to truly be accountable and stand on its own, it looks like it's burning about $80,000 a month. Well, that's too much. Do we really want to own that? Like, does that really make sense? And sometimes when you carve these pieces out, not only does it become more exitable, it becomes more accountable. And you start asking questions like, do we really need this pet project if we're going to realize on a P and L, this loss. Right. We're going to have to deal with it. I think you just get more intelligent, especially if you're a serial entrepreneur like we are, you always have new ideas. It forces accountability from them and it makes the businesses stronger and it allows you to compensate and to better, you know, to provide equity for the people who are actually responsible for those projects and not giving it the whole. So it's safer, right? It's a safer way to do it too. So I guess the question that I'm, that I'm wondering now is what's the right time to spin out an egg? Obviously you don't want to do it too soon. If every time you have an idea you say, okay, well we got an idea of this thing that we might want to do. So let's set up a new entity, a new accounting system, a new taxpayer ID number P. Ls like all this stuff that can get really, really cumbersome. But if you wait too long, then you're not going to get the value. It's going to create confusion whenever you go to raise capital or when you go to have an exit. So in your opinion, what's kind of the right time to be thinking about spinning out an egg?

It's a great question. It's just an arbitrary number, but I know we've gone through different iterations where we said when something is generating a steady $50,000 a month, we're going to do that or it's generating X. I think you just pick a number and say when we've got product market fit so that we feel that we have a winner and when we have a growth engine, ideally for that thing in place so that there is a predictable selling system and we know that it is likely to continue and it hits whatever financial trigger you want it to hit. I'd say it would be those three things and at that time it would make sense, I think, to invest because you're only Talking about maybe $5,000 a year in extra costs to do that, you know, on your addition, on your existing structure that you've already got. So it's definitely worth it, I think, at that point.

Yeah, I love. Because I mean, I think definitely when it is doing, generating a million dollars a year, if something's generating a million dollars a year, it probably can be sold. Now it's not going to be sold for a massive multiple if it's doing a million in revenue. But if it's doing a million in revenue, then it's not hard to imagine it getting to 10 million in revenue and 2 million in EBITDA. And that's when it's just the floodgates open up in terms of prospective buyers. So I like the idea of 50,000amonth because that's when you see a clear path to a million dollar, million dollar year. That's the time to start looking at it. And I also like the addition of. But it needs to have its own growth engine. Like it needs to, you need to feel like this is going to continue coming. And I think it's okay if in the beginning, you know, like in the beginning when we spun out our event management company, it's only client were internal companies, but there were enough events at those internal companies that were like, it's going to do enough in billing. So let's spin it out. Let it do it, let it do its own thing. I think the key is when you do spin it out, it either needs to be independently profitable when you spin it out, or you need to make sure that it's, that it's independently funded. I think that's the key. So take a look at it when it's doing about $50,000, you know, a month and say, okay, if we were to spin this out, what kind of dedicated team would it need? If we were to give this a single threaded leadership team, right, it's going to have a general manager, it's going to have, you know, heads of sales, marketing, products, services, whatever the functional departments are, it's going to have a team, right? When you look at that, you say, okay, it's going to have its own people, we're going to spin it out, we're going to start to build that out and you know, imagine its own org chart, imagine its own expense profile. What would need to be true, you know, for it to be self funded, self sustaining. And if the answer is, well, we need a double, triple, quadruple in size, okay, then I think your answer is it either needs to stay in the fold for a little bit longer, incubate a little bit longer, or you need to say, that's fine, let's just get it separate funding, right? And that might be the time, you know, just definitely, if you're going to get separate funding, get it its own entity and make sure you're funding it not just for a month or two. I mean, give it a solid 12 to 18 month Runway is sort of what. What we would recommend. But that's, I think, a good general rule of thumb. Anything else you'd add to that?

That's it. I think we covered a lot. And so even if you just think about that very first part where you've got your holding company and you've got your secret sauce slash intellectual property company and you've got your operating company, if you just. That's going to put you miles ahead, I think of most people it's going to give you good liability protection. No legal advice here or tax advice but but gonna give you tax flexibility and it's going to give you the ability to ultimately hold people accountable and only reward people for the things that they actually do or that they actually invest in.

Yeah. And I would encourage you definitely seek good legal counsel in your jurisdiction about this stuff. Cause laws do change. If you talk to your attorney about this and they kind of go a little bit cross eyed, it might be time to upgrade your legal representation also. Shameless Plug this is the kind of stuff we talk about all the time inside of Founders Board and you know, kind of the higher level issues that as you're scaling from 7 to 8 and 8 to 9 you really need to consider. These are the things that we take on and talk about. So if you like this, if you are toying with these ideas again, we don't give legal advice in Founders Board but we do connect you with folks who are doing this and get to talk to peers and us about the overall strategy. Shameless plug founders board.com apply founders board.com apply and even better if we partner together in this. Roland, I know this is something that we don't talk about enough. It's that our evil scheme, our reason for doing all this stuff, whether it's business lunch, podcast, whether it's scalable, Founders Board, all of this is because we want to do deals. And so yeah, if you've got a business that is seven figures moving to eight, eight figures wanting to move to nine and you want our help with these kinds of things, we would love, love, love to talk to you about possibly partnering together. You can let us know if you you know, apply a Founders Board. You can mention in the notes that you're interested. You can also just hit us up on any of the social channels. Our DMs are generally open. We're you know, we're open and active and would love to chat with you about that as well. But that said, I'll give you the final word. Take us home.

Very cool. I think that's it. Thank you guys for listening. If you do want kind of some guidance with this type of stuff, it is something that we work with people on a one on one basis as well and so feel free to reach us out as lion reach out to us. As Ryan said on social media we're forward slash our names pretty much everywhere and we appreciate you listening. If you like this I would love for you to share it with a friend or 200 friends. However many friends you have, we'd like for you to share it with all of them and, and so that we can spread the word because we love talking about this, we love working with people, people like you, and we love being able to give value back based on the things and experiences that we know. So that's it for today and we'll see you next time on Business Lunch.

Ever wondered how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system, the right deals and the right guidance. And that's exactly what we give you in the EPIC Deal Fast Track. If you've been thinking about buying a business, but you keep getting stuck, whether it's finding the right deal, structuring the financing or negotiating with sellers, you are not alone. Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal Fast Track is not another course. It's actually an implementation program and it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're going to plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the Deal flow engine.

So you always have high quality off.

Market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers to that get accepted and fund them creatively many times with no money out of your own pocket. And number three are closing and integration systems so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an EPIC Deal Advisor every step of the way. And that's people that have actually come up through this system and done these deals themselves. That's the only way to become an EPIC Deal Advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines, just text I'm in to 334-458-9034 and we'll get you in. So text I'm in to 334-458-9034 will get you in. No fluff, no wasted time, just real deal making from people that are actually out there doing deals right now.

I'll see you there?