From Passion Project to Corporate Casualty: The TNC Saga

0:00Yeah, no, I mean, what you brought to it was an elevation of the original vision, which was let's continue to have everybody leave saying, wow, that was the best event I've ever been to. You just brought in the element of sponsorship revenue. So that allows us to monetize the event without having to necessarily pull from those folks who we want leaving saying, wow, that was the best event. And you gave them a new reason to say, wow, that was the best event because it was so elevated from an experience perspective.

0:32Hey, everybody. Welcome to another episode of Business Lunch with your hosts, Ryan Dice and myself, Roland Frazier. Ryan, how are you today? I'm good. I had kind of a rough night last night. I know you did too, but I was sitting in bed. I don't know if you've ever had this experience, and I was all alone. So Emily, my wife and the girls, they actually flew out to Toronto to go to the Taylor Swift concert. And then my youngest decided he wanted to sleep over at his Mimi's house at my mom's house. So I'm like by myself, which I'm actually like very okay with, but I'm sitting in bed, I'm trying to get some work done.

1:08All of a sudden I smell some smoke and I'm like, that's probably not great. I'm like, maybe it's just like the heater turning on, starting to get a little chilly. I'm like, but it's not on when, right when I'm starting to think like, what could it be. Oh, hell breaks loose. I mean, it's like fire alarms going off like everywhere, like, like in the house. I'm like now running around all over the place trying to figure out like what in my house is like on fire, like what's going on. Fire trucks come like had to call 911. Never could find anything. I guess there was like a short somewhere. Never could find where it was.

1:44But yeah, like, so this happened around like 11 o 'clock midnight. Last night? Yeah, yeah. So you haven't found it. So there's a decent chance it happens again. Yeah, good chance I get back home because, again, nobody's there. And it's just a smoldering mess. So I've been checking the news, local news, to see if that was the case. So yeah, a little sleepy because I got no sleep. How about you? You feeling spry today? Well, I'm drinking a... That's because I know you're not. I'm drinking a cherry Coke, which I haven't had since I was a kid. It just happened to be the only thing with caffeine that was in the refrigerator that I could find to try to get myself to come to life because we were up until like three something in the morning and had a 7 a.m.

2:30start today meetings at 7 a.m. So it's been kind of crazy, but nobody really probably cares about that for us. So one thing that I do know, though, that a lot of people have been asking about is that one of our events, Traffic and Conversion Summit, has announced officially that it is no more. And a lot of people would love to know that story. And I was wondering if we might want to talk about it a little bit here. Spill the beans, sing like a bird, tell all the dirty, dirty backstory. Yeah. Yeah. Name names, throw people under the bus. Is that what you're thinking? some dirt. Yeah, no, it might be good, kind of cathartic if nothing else.

3:18I'm sure there's probably some business lessons in there too. Yeah, no, I think it's good. I think it's something definitely worth talking about. Yeah, it might be good maybe to kind of take in three parts, like talk, maybe kind of give the backstory, maybe what happened sort of post acquisition and in that interim phase, like, you know, kind of what happened when we owned it, what happened after we sold it, you know, and then where do we see maybe the future going? Okay. What do you think? I think it's great. Okay. Let's start at the start. What are your thoughts? Yeah. I mean, so for those who don't know, just to give you, I guess, a brief, you know, history lesson back in, I think it was 2008, 2009, our business partner at the time, Perry and I decided that we were going to put on a marketing event.

4:05And actually we didn't decide it. He decided that we were going to put on an event for, for marketers. And I just remember thinking, I don't want to put on an event. Um, cause I just didn't want to, it seemed like a lot of work. I'm an introvert. The idea of like, Hey, let's have a bunch of people in a room who I have to talk to sounded terrible. Uh, and it seemed risky. So it was like everything I hated all wrapped up in a, you know, ugly, you know, turd, you know, colored bow. Yeah. Terrible. So, but he's like, no, no, we'll do it. We'll make so much money. All these people are making a lot of money, which by the way, was not true at all.

4:39But I, so what I told him, I was like, okay, we can do this, but the reality is most events suck. They're just a pitch fest. You know, you go to these events as an attendee, you sit in the crowd and just one speaker after another, giving some faux content. At the end, they try to sell you their stuff. And then another person comes up and does the same thing. I was like, I don't want to participate and contribute to that. So if we're going to do this, our goal is not going to be to make a lot of money. Our goal is going to be to have everybody leave saying, wow, that was the best event I've ever been to in my entire life.

5:09And so we did it, put on the event, 289 people showed up year one. And true to the goal, we made no money. In fact, we lost a lot of money. But people did leave saying, wow, that was the best event I've ever been to. And so we said, let's do it again. And if I'm not mistaken, you actually came out, you were an attendee at that second event that we did. Right. I don't know if it was the first one or second one. That it's, it's a really good question. Um, I, I honestly don't remember which one was the first one, but, but I believe it was at the very first one, but I can't. Okay. Yeah. So you're right.

5:45You, yeah, you probably weren't at the first one. All I remember, you know, we decided to call the event traffic and conversion summit. Cause I just remember thinking really businesses need two things. They need traffic and they need conversion. And so what we'll do is the first day will be about traffic. The third day will be about conversion. I'm sorry, the first day will be about traffic. The second day will be about conversion and we'll figure out what the third day will be. And we truly had no idea. Just like classic, right? Classic. And so, but you know, what I think was cool is it is that classic entrepreneurial experience, right?

6:17Where that accidental entrepreneur, let's start a little business. Let's see what happens. And you wake up and you turn around. And I remember it was year three. And by the way, the only reason that we did an event the second year was because the hotel brought us the bill at lunch on day three. And I remember it was a big bill. And I remember we did not have the money to pay it. And so we came out after lunch and we're like, hey, everybody, we're doing it again next year. And the only reason that I agreed to do the event next year was because we needed money to pay for the event this year. Just that's the truth of the matter.

6:52And so we did it. Year three, it was clear that it was a thing. Year three, there were 800 something people in the room. And I remember, you know, talking to our team and thinking like, this is a thing. Like this is not just an event. This is a thing. This is a community. This is a company. This is a business. We should make this a thing. And it was actually out of that event that we launched digitalmarketer.com, the business that we still own today. And so eventually Digital Marketer became kind of the brand that owned TNC. A couple of years later, you wound up partnering with us, investing in that company, joining with us.

7:31And you really were an integral part of taking this business from taking this event in particular from something that really was just, you know, Perry and I going up there and sharing stuff into an event that really could kind of stand alone. I don't know if you kind of want to pick up what you saw at the time and some of the changes that you made really to make the business more scalable and ultimately more sellable. Yeah, I mean, I know that we talked about production value and really it was a significant increase. I think it was double the already reasonably significant production cost to go in 2013 was my first one as a partner with you guys.

8:16And then 2014 was when we said, let's up the game. And it was very different. It was the exhibit, the exhibitors were miles ahead of where they were before we brought in, you know, focus to how do we sell, you know, how do we get exhibitors? I think there were eight, you know, it was like, I remember it was like 40 grand or something of sponsor revenue the first time that. Yeah. I mean, the first couple of years, it was a couple of folding tables. And I think like literally just a couple of people were like, hey, if I give you some money, can I just set out a table? We're like, yes, have at it.

8:52So we had a whole team of people doing that, like with, with a focus. And, um, and I remember walking into the exhibit hall in 2014 and I was like, man, if they only knew that it was just three people that didn't really know what the hell they were doing, they were putting this on, it looks professional. I was like, I walked in and I told my wife that I said, this actually looks like a thing. And then I went in and AV was like the, the whole AV production spectacle was, you know, amazing. And we took out selling from the stage at all and said no more selling from the stage. Um, it was, you know, it was that the, um, the, the speaker budget to, um, attract, uh, higher quality speakers to come was, uh, was pretty cool.

9:40And, um, and I, I think like those, those things and a focus on those things and all of the ways that we could create monetization outside of selling stuff to the people that attended and actually make the event make money on its own, which turned out to be why it was saleable. And I think those were probably the major things. Do you have any other things? Yeah, no, I mean, what you brought to it was an elevation of the original vision, which was let's continue to have everybody leave saying, wow, that was the best event I've ever been to. You just brought in the element of sponsorship revenue.

10:18So that allows us to monetize the event without having to necessarily pull from those folks who we want leaving saying, wow, that was the best event. And you gave them a new reason to say, wow, that was the best event because it was so elevated from an experience perspective. And yeah, I mean, so the people that were there the first, you know, one, two, three years when it was just a single ballroom event with just kind of us going up there talking about, you know, God knows what with no real formal agenda. I mean, I remember walking out on stage and saying, we have an agenda. It's for entertainment purposes only.

10:50We're kind of going to take breaks when we want to. You know, good luck, you know, to actually have 10 hours with no, I mean, like one break. It was insane. Yeah. I mean, losing boy. I mean, and I remember just, you know, it going to where it was a very structured, very professionally run event where everybody was still very, very happy. But then as the event was growing, and I think this happens to a lot of businesses, it felt like it was getting big and scary, like to me, at least. I mean, I remember when we're getting six, seven, 8 ,000 people coming out to this event, you know, when the budget is getting to be, you know, millions and millions of dollars.

11:32I would have these recurring nightmares of like something going wrong, you know, at this event. And I remember it'd be, you know, I'd walk out of the event and there's literally nobody in the audience and we've gone completely bankrupt or, you know, just some horrific thing like taking place. And your nightmare was what actually happened when they failed to announce my session a couple of years ago. And I walked out into the main ballroom that sat 5 ,500 people and there were like six people there. That's true. It did actually happen to you. That was my nightmare. But but yeah, so we were fortunate in that we've been running the event at this point, I believe, for nine years.

12:08And then we were approached by by the second largest event management company in the world, Clarion Events. They reached out to us and said, hey, we love what you built. We want to expand into the digital marketing space. They had already acquired another related event, Affiliate Summit. And they felt like our event, Traffic and Conversion Summit, really could be sort of the platform event into this broad-based strategy that they had to really create this festival of marketing kind of thing. And I remember thinking that the vision that they had was really, really cool, like something that was really cool, something that we all wanted to be a part of, and something that they were uniquely qualified to pull off.

12:49Plus the concept of we had tried going international and gotten totally screwed over by the promoters in Australia that kept all of the money and basically went bankrupt. And another one, I think also before we did the sale, that was kind of our second attempt at Australia that was at best break even, if not a slight loss. And we realized that we just didn't have the skills to take an event international. And what Clarion offered was that was one of their models was what they called geo cloning, where they just clone the event that is in, at that time, I think San Diego was, we had moved Austin to San Francisco to San Diego.

13:39And so we're in San Diego and they're like, we'll do maybe a East coast TNC. And then we'll do one in the UK or, or Europe, Western Europe. And we'll do one in maybe China. And so, and we're like, yeah, this is our, this is our chance to have somebody that actually knows what they're doing, that has a global team, global experience, already operating those events and a model that is going to make sense for us to expand this thing. It's like a true partner because I don't, I mean, we weren't really thinking, gosh, we need the money then. I mean, it's always nice, but that wasn't the primary motivation.

14:16The primary motivation was to stop your nightmare and to actually have a partner that knew what they were doing to expand. And so that's kind of what we were thinking when we entered into that, right? Is that your memory as well. Yeah. And it did help that the offer that they made was a pretty significant offer at the time, one of the largest multiples that they had ever paid for an event. So that definitely didn't hurt. But yeah, we were genuinely excited to be a part of the event moving forward. And I think that's important because a lot of times when people sell a business, they're selling it and they want to get rid of it and they want to ride off into the sunset.

14:54We really did see it as these are our strategic partners. Now, I think it's worth kind of pointing out because there's a really cool kind of business lesson in this because at the time, Traffic and Conversion Summit was not a separate business. Traffic and Conversion Summit was a product. It was a business line underneath Digital Marketer. It operated on its own P &L, but it was a separate product line. And so when they came to us originally, they were basically, we want to buy your event. And they were kind of expecting to get Digital Marketer, the business for free. And pretty quickly, we were able to sort of squash that.

15:30So can you kind of speak to just from a strategy perspective, you know, how somebody if they're thinking about selling their their business, how maybe, you know, sometimes it's better to carve off a part of that and more of a goose and eggs type model. we're going through that now with, uh, with, with somebody that we're helping with it and exit because we, we help people sell their businesses too. And, um, and I think it's, it's something that most people don't think of. And so I like to kind of call it thin slicing. And, um, so it's two concepts together. Um, and one of them, I was trying to think of how, how much detail, but in real estate, there's a thing called fee simple real estate.

16:12And that's all of the, it's a legal concept that a fee simple piece of real estate is all of the rights. It's a bundle of rights. The rights are like a bundle of sticks and there's air rights and water rights and, you know, mineral rights and usage rights and land rights and all these other things. And they're all included. But what you can do with real estate is you can break up the bundle and sell off different bits of rights. One of the most famous would be our president-elect, as we are recording this, Donald Trump, who bought the air rights above the Tiffany store in New York City and built Trump Tower and made an insane amount of money.

16:52It's because that was a right that Tiffany could sell. Similarly, they could have sold the mineral rights underground and somebody could have side drilled for oil or something like that. And that would be, that would be okay. So I started taking that legal concept and applying it to businesses when we're selling it and saying, what I noticed was that a lot of businesses get bought because the buyer wants one particular thing that business has. And they don't want or know how to operate or want to operate the rest of it. So they'll basically buy a business and take the thing that they wanted. And then all of the rest of it just gets shuttered, mothballed, shut down.

17:41And that when you're negotiating to sell a business, if you can identify what is it that the buyer actually wants, And what will be of no value to them? Then you can very often carve out the things that they don't value and not take any less for the business. And so in this case, they had actually done a study. They hired a consultant to do a study to see did they need to buy digital marketer? And the consultant took a whole bunch of money and said, nah, it's a nice to have, but not a have to have. which is good because Digital Marketer was quite profitable on its own. And it would have been a significantly higher purchase price to buy that as well.

18:30But we didn't really want to sell it. So what was interesting about that was we said, okay, well, let's split TNC off into another company. Let's figure out the assets that this company wants to buy, which as it turns out was what they considered the event was the URL the website, right? The trademark for the name, Trafficking Inversion Summit, and the back catalog of event footage and the customer list. That was pretty much it. And so we negotiated to sell only those things. And we still received, I think they told us it was the highest multiple that they had paid for an event. And we were really, really happy at that.

19:18And I think the multiple worked out to be almost two times the low multiple that they first came. They come at you with a range and they'll say between X and Y, and we ended up just a hair under 2X. And so what we actually sold was only those few, few, few things. And they were happy with it because they didn't want to pay more than they had to. And we were able to come to an agreement to sell those. Anything you want to add before I take that on farther? Nope. I think that kind of gives the structure to the deal, you know, kind of the backstory. So that, I guess just more from a context perspective, at this point, we sell the event in 2018.

20:03We then had our earn out part of the way that we were able to generate such a high multiple is one, you did a great job negotiating a high multiple, but then we also had a significant earn out, which was due to be earned the next year in 2019. So a lot of this is just kind of luck and good timing. Obviously, had our earn out been in 2020, the story from our perspective would have been very different. Yeah, and they basically came at us with a typical deal, which was a carried interest or a rollover interest where they would purchase a majority. It was, I think, 80 % was the first offer. we went to 90 % for a little bit.

20:46Obviously now we wish we had stuck with that. And then we ended up settling on 80%. So we sold 80 % to them and that was cash plus one year earn out. And we blew through our earn out, meaning we met it and then some. And so we got the absolute maximum that you could possibly get under the deal, which was almost twice what they had paid for anything else, which was pretty great. And that's, I guess I'll talk a little bit more about that structure. As part of it, we did a contract with our event management company because we had the The goose and eggs is that if you've got momentum, if you can keep the momentum in one place, in one entity, and the momentum is the ability to generate customers at scale, and you can then take the other things that you can focus the faucet or the fire hose of those customers on and turn those things into different businesses that those customers might be interested in, then that's a great way to scale super fast.

22:05And so we turned the fire hose that Digital Marketer was for accumulating customers onto multiple things, including Traffic and Conversion Summit. And then to service the business, rather than having all of the businesses have to have their own separate teams, we created a BPO, a business process outsourcing company that basically housed all of the people and functions that made all of these things go like accounting and HR and sales and marketing and all that. So none of those people had to go when we sold it and we got to keep all of them. Plus we got to keep all of our momentum entity, which was digital marketer, to be able to prop other businesses up.

22:49And it was also good because they didn't need any of the people because they already had a team. And so all those people would have lost their jobs and been fired. So when you're structuring deals, if you have a momentum entity and can create these others, that's a really cool way to do things because you'll probably save everybody's jobs in addition to not giving away a really valuable asset that the other folks might not appreciate. So that was the structure. We also, on our 20%, so that we weren't stuck in a minority position forever with the company, we negotiated what's called a put option, which would allow us to force them to buy us out after five years and five years after the sale, which if you're doing your math would be 2023.

23:35And they also had a call option. It's called a reciprocal put call. And the call option allowed them to force us to sell. And it was a sale as is common in the industries at the multiple that the original sale had happened at. So if we were bought out of our 20 % interest, we would get whatever that 20 % of the profits was times the multiple that we sold the business for. Do you want to talk about the big dumb mistake we made there? Yeah, I am. So we were, which I had never seen before, because I guess there hasn't ever been a pandemic before in recent memory. But so that was it. And we felt very good and we felt covered and protected on our ability to get out.

24:19And we felt very good about going forward. We also had with our BPO and our different other entities, we had a marketing agreement. We had an event management agreement. We had all of these other agreements with our companies that they didn't buy to do everything that made that business go. And that's a really cool strategy too. Because again, those companies can do all those things for any other company as well. So we lost none of our momentum at all. And then pandemic happened. Yeah, sorry, just kind of put the point of the other one, just kind of set the tone. So here we are, it's 2019. We've sold this event.

24:58We've pocketed enormous amounts of millions of dollars, right? We still own the core business asset. We still own digital marketer, which is the company that was essentially running this business. And the beautiful thing is the way it was negotiated. We still effectively controlled significant aspects of the event. We controlled, you know, in many respects, how that was going to be marketed. We controlled the programming of the event. So who's going to be on stage, which meant we still got the benefit of the platform of the event for our other brands, for strategic partnerships. I mean, you want to talk about having your cake, the cake of the person next to you and the cake of the person across and eating all of everybody's freaking cake.

25:41I mean, that is basically how this deal went down. And so Roland, how did it all, oh, there's more. There's cake on the cake too, because we also got first choice of the best booth space on the Expo floor for free. And, and we were the only people that could sell anything from the stage. Yeah, only people as the, yeah, as the presenting sponsor, you know, as we were the only one allowed to actually make an offer from stage. So we got the full benefit, you know, still of the platform for all of our other businesses. So it felt at the time, like we had truly pulled off this master truck and ideally had.

26:29And if this event was now going to continue to grow and flourish and be internationalized, it was going to be the high tide that pulled up all of the respective ships. So how did everything go so horrifically wrong? Because here we are today, we get bought out of this company for literally nothing. So our 20 % gets taken from us and we made$0 off of that. And then the event gets shut down completely. And here we are today. So that's the backstory. Now let's talk about how everything went so horrifically wrong. Again, swimming, swimming the crap. We're going to name names. We're going to throw stones.

27:06I'm just kidding. Kind of. And then that last bit of structure too, like how did that happen? So we had this, this put call option and that allowed us to force them to buy us out or vice versa. The challenge was that if you do your math and say a five-year option from 2018 selling put us at 2023, which was right on coming out of the pandemic and a unfortunately timed move of the event to the convention center format, which was significantly more expensive, but which the Clarion people had planned to do and they knew, they know, you know, they know that business, at least with expos. So when the agreements that we had to help program, run, et cetera, the event expired at the end of 2022, the next step was to renegotiate the contracts.