How To Build And Expand Your Portfolio

0:00Build single-threaded teams. At the planet level, every single business unit gets its own leadership team. If there is one thing that I've seen that is massively overrated in holding companies, especially holding companies where they're not all doing exactly the same thing, it is the word synergy. We have tried this again and again and again. Oh, let's buy this company. Let's bring it into the fold and let's have our marketing team do marketing for all of these different companies. It'll be great. It literally has never worked. How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who shared their biggest secrets on how they think and achieve success?

0:47Grab your seat at the table because this is Business Lunch with Roland Frazier and Ryan Dice.

0:55Welcome 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.

1:31Two sessions. The first session that we're going to go through, we call the portfolio entrepreneur. And it's exactly what Sam talked about. How do we go about operating, owning and operating multiple companies at the same time? One way that we do it is we don't operate them. Okay. And so when you heard from Richard earlier, and I say you need a Richard, you know, eventually you're gonna need a lot of Richards if you want to have a lot of companies in your portfolio group. So we're going to speak to structure, we're going to speak to general best practices. If you have questions related to this topic, write them down, hold them, we're going to tackle all your questions when we go through the second part of this session.

2:09we're going to go through how to invest like an entrepreneur, how to be an entrepreneurial investor, how we invest our own money as these businesses generate a lot of distributable cash. As you have exits, what do you do with that money? Do you just give it, you know, put it in a, you know, in an index fund? You just give it to a fund man? You know, what do you do with the money? We're going to share what we do. Disclaimer, this is not individual investment advice. Past performance is no indicative of future performance. Your results may vary. Okay. How'd I do? Is that pretty good? And you're very likely to lose your full investment.

2:41Yeah, you'll almost certainly lose your full investment. But we're going to tell you, we're going to say this is what we do with our money. Because I think that that's a fun way to do it. So let's get started. The portfolio, entrepreneur, how to run multiple companies at the same time. Essentially, this is what you get to do when you achieve exit number three. And so in all of our businesses, anytime we're foolish enough, and thankfully we've largely gotten out of this practice, but anytime we've been foolish enough to start a business, we are over starting businesses. Every now and then we'll have an idea and it's like, let's not start it.

3:16Let's go see if we can buy one instead. I'll generally give him my favorite financial advice or business advice on starting a business. I'm like, that's really cool, Ryan. We could make hundreds of dollars. Hundreds of dollars. Hundreds of them. All the hundreds of dollars. No, our goal in any time we're involved in any business is for us certainly to achieve exit number three to exit the org chart. Also, when we're working with entrepreneurs, if that's their goal, we want them to do it as well. What we're talking about here is what you get to do when you achieve exit number three. How do you achieve exit number three?

3:46You have an operating system in place and you got an operator to operate the operating system. That sequence, by the way, is really, really important. A lot of people want to try to get a Richard before they got an operating system. It's kind of tough, right? What you really want to do is bring somebody in to help you create the operating system and then you bring the operator in to run the operating system. If you got an operator, cool, have them do that, but generally sequence system, then operator to operate the operating system. Let's say we got all those things. Exit number three, you've exited the org chart.

4:13Now, if you want, you've got a couple of choices that you can make. You can say, okay, all I want to do is focus on this one core business. I want to focus on it. I want to grow this one business. And that could be a really good focused thing. I just want to keep all my focus here. And I know lots of entrepreneurs who have done that. what you can also say is, this is great. I want to do more of these. Does anybody else suffer or struggle with entrepreneurial ADHD? Yeah. People have said, they're like, you know what? I think you would have been a lot more successful if you just focused on one company and just grown that one company.

4:50I don't know that that's necessarily true. In many cases, I don't think it's true. Here's what I know. It wouldn't have been as much fun. Would have been certainly not for me. Here's the other thing I know. Every major company at scale scale eventually becomes a holding company. Every big company at scale that you know of eventually begins to acquire other businesses and bring them together. So even though you think it's one business, it is not. Roland talked about roll-ups, gave you lots of examples. So even if you're thinking, oh, I just want to focus on this one business, really good chance if you focus on scaling one business, that one business is going to turn into a holding company.

5:23So what is a holding company? Holding company is a company whose primary interest is to own a controlling interest in other companies. Pretty simple. That's a holding company. It's a company that, wait for it, holds companies. I know it's day three, but are y 'all following so far? Okay. What are some types of holding companies? Roll-ups. This is what Roland talked about yesterday. Right? These are companies that look to accumulate businesses that all do more or less the same thing in pursuit of that magic business word synergy right synergy and and uh economies of scale so waste management did this uh anytime you there's there's an industry where there's a lot of small little players pretty common go in there roll them all up give them similar branding obviously uh that's what sam's doing right now our buddy marcus lamones did that yeah he's got one of the more well-known ones well and what for those who don't know who is he and what does he do Marcus has had a show called The Prophet for several years.

6:24He's got a couple of new ones that are out now, but he's a friend of ours who is the CEO of, what is the name? Camping World. Camping World. So he rolled up RV parks. It's really funny because if you know Marcus, you know he's not really a camper. I don't see him as a camper. He's not really an outdoors kind of guy. No, I don't see him that way. He's definitely not. Yeah, so that's a roll-up. So the idea of a roll-up is we're rolling up the same types of businesses, generally putting them under one brand, but we're trying to get a bunch of them all in one, grow inorganically. The second is the accumulator.

6:55We're talking about a cluster of different businesses. They're generally in the same industry or they have the same business model, but you're not necessarily looking to integrate them together, right? Roland mentioned yesterday, LVMH, Louis Vuitton Moet Hennessy, right? What this is, is this is an accumulation of luxury brands. So in this case, a lot of different brands that have very similar systems, very similar playbooks, right? They've got, they're going through similar distribution channels. When they're buying another high-end liquor, they can place those and slot them right next to their other high-end liquor.

7:35It's also generally known as a house of brands. Yeah. That's another common way of talking about it. Yep. Constellation Software. How many of you have heard of Constellation Software? Raise your hand. Not a lot of people, actually. Constellation Software is one of the most valuable software companies in the world based out of Canada. Most people don't know Constellation because they basically have bought up a lot of legacy software companies, particularly software companies that aren't SaaS. They're not in the cloud. And they've accumulated all these companies and they've built just billions and billions of dollars of enterprise value.

8:08So that's the accumulator. You have a Pure Holdco. A pure hold co is just a portfolio of completely unrelated businesses that primarily it's functioning in a capital allocation capacity. Also known as a conglomerate. Also known as a conglomerate. Also known as Berkshire Hathaway. Right. So Warren Buffett, he owns Geico. He owns Coke. He owns a large chunk of Apple, I think, still. What do these companies have in common? Nothing. What resources do they share? None. Okay. This is a pure holding company. and then there's another group, kind of a subset, the platform. This is a holding company that's made up of multiple accumulators.

8:46And what you see is that the holding company is fractal. So it's very common, and this is the case with us, where our holding company will acquire a company and that company will eventually become a holding company. And then it has another company, which is another holding company, and this whole thing is brrr, right? It's kind of like a family. Kids have kids and you've got grandkids. So you have holding companies that have holding companies and they get moved around. And most of the really large Fortune 500 companies that you know about that are listed as one company are really a combination of a lot of different companies.

9:18Most of your billion-dollar companies are actually a collection of 10 and 100 million-dollar companies. Most of your 100 million-dollar companies are collections of million and 10 million-dollar companies. That may not be how their entity structure is, their accounting, but that's functionally how it works. Yeah. And let's talk about, because a lot of you ask about entity structure so uh probably the most common question is do i need to have a company for every company that i've got and the answer depends but the answer is really dependent upon what is the goal or the outcome that you've got because if generally from a legal standpoint as an attorney which i'm not advising you no legal advice being dispensed here this is entertainment purposes only Are you entertained?

10:00Are you not entertained? But what we generally say is you want a separate company to provide a liability shield from each of the other companies so that the assets of one company are not at risk should something go awry with the other companies. And when you're doing this personally, you can decide what is my acceptable level of risk. So you generally should start with one company. It could be an LLC or a corporation. It doesn't really matter for liability purposes. It does matter for tax purposes. But from a liability standpoint, when you get enough in that company and you're thinking about doing something else, then it's a good idea to take a pause and say, would I be upset or financially disadvantaged if something bad was to happen with this new thing I'm thinking about doing and I was to lose the assets of this company usually when you get to a certain level the answer is yes and so we start a thing called an SPV so SPV is the attorney's way to charge big fees to form an entity that is uh that you can get on legal zoom for nothing but we call it that because it's for a special purpose so spv special purpose vehicle which is different from sales profit value but so each time you want to do a new deal i do recommend that you set up a new spv and let that operate and then you'll ultimately start with one company as it acquires the next thing it's a holding company as you get to the point where you don't want the assets of that company to be at risk, then you start a new company.

11:42You might also play with or talk to your tax advisor about the difference between C-corps and LLCs and sub-S. Sub-S, generally, you're going to be out of because you're not going to qualify. But the tax liability gets frozen in a C-corp. And it can be advantageous if you live in a high-tax country or state to have entities that are in tax-advantaged states or countries. Apple does this. Google does this. Everybody that is financially sophisticated and has enough money to make it make sense does it because then you're going to end up corporate taxes right now cap out at 21%. If you have a corporation that's a C-corp in a tax-free state, you're paying 21%.

12:30You don't care about capital gains because they don't have capital gains. So maybe you buy a company and you flip it. And if you flipped it personally, you're in roughly a combined 45 to 50 % state and federal tax combined rate. And you could save 39%, right? Is it no 29%, 29 % of what you sold it for had you just had the right structure. So it can be very significant to do this in the right way. And when you think about how compound interest works, when you're saving 29 % and then that's compounding at, say, you're only getting 30 % on your money over year after year after year, it really adds up quick.

13:13So that planning on that structure is super, super important. My rule is always to pay as many taxes as possible because I think they just do such a great job with it. They do. And what's nice is you can just ask them and they'll calculate it for you. It is nice. They do that. I've heard that. So the way that we, excuse me, the way that we think about this and we approach it, kind of the visual that I use, and I drew this to try to explain it to somebody one day, we think about it like a solar system analogy and an orbital portfolio. So if you think about the center, you've got the sun. This is your main holding company.

13:45Okay. This is your main holding company. There's not a lot, there's no activity taking place there generally. It's there to hold the other businesses. the planets that are orbiting around it, these are your actual operating entities. Okay, your operating entities are there. Now, it's common, and to the point that Roland made, sometimes you want to try something new. You're going to launch a new product, or you're going to launch a new media property. And you don't necessarily want to spin it out into its own business yet. You know, you want to just see, is this thing going to, you know, is it going to take off?

14:20And so what we'll do, we think we call that a moon. We'll think about it like a moon. We won't give it its own management team or anything like that. It's still too early. We won't necessarily even set up a separate entity, maybe not day one, but we might give it its own class, for example, you know, inside of your accounting system. We want to still be able to think about it a little bit separately. Usually as more of a project manager than like a CEO or a dedicated employee. Right. It might have a marketing manager. It might have a program manager, but it's going to have a really, you know, small kind of scout team that's associated with it.

14:53That's a moon. Now, sometimes moons grow in mass to where they can spin out and they can maintain their own orbit around the sun. And when this happens, that's when the special purpose vehicle, the SPV is set up. That's when it's spun out. That's when it gets its own management team. That's when it becomes its own planet. Sometimes it doesn't get big enough to do that. And it keeps swirling back around. That's fine. That just means it's a product, a program, a service, a media property of the other planet. And so this happens. And sometimes, again, things will go back and forth. We will have business units that take off and then maybe they don't quite able to maintain.

15:31So they got to get pulled back in the gravity of the company that launched it. So this is kind of how we think about the analogy. And so you'll hear me talk about suns. You hear me talk about planets. You hear me talk about moons. The sun is your overarching holding company. The planets are the individual operating entities. The moons are the crazy little moonshot ideas that you have that you want to try out, okay? So hopefully that analogy will help. I want to give you seven rules for running a holding company. Again, we're going to go through these seven rules. We'll riff on it. Any questions you have, hang tight.

16:04I'm sure there's going to be a bunch when we go through the entrepreneurial investing. We'll answer all the questions up front. So rule number one, and this is really, really important, build single-threaded teams. At the planet level, every single business unit gets its own leadership team. If there is one thing that I've seen that is massively overrated in holding companies, especially holding companies where they're not all doing exactly the same thing, it is the word synergy. We have tried this again and again and again. Oh, let's buy this company. Let's bring it into the fold and let's have our marketing team do marketing for all of these different companies.

16:43It'll be great. It literally has never worked. It's interesting because we like the idea of shared services and shared services is a good concept. But what we have found is that when it comes to the marketing team and the sales team, they're not shared well. Because they've got the things that they're doing. They've got the list that they're working with. They've got their email campaigns that are already scheduled, their promos, their content. and it just is hard to get anything new in there. And so it's actually been very frustrating and cost us tens of millions of dollars in deals that we did early on where we would get equity in a company and then couldn't do anything and ended up giving it back feeling bad because we couldn't free up the time in marketing.

17:34So like if you think you guys own Digital Marketer, so I've got a SaaS company, I should basically let you acquire part of my SaaS company because now I'll be the SaaS company of digital marketer and you guys can do my marketing. It won't work. Ask me how I know. I watched it very frustrated several times. We're both like, why doesn't this work? What works to share is finance and HR and things like that. But when you get to marketing, it's really legal would also be another one that's good to share. But when you get to marketing, it's a challenge. And even within the company, what we've started doing is having one marketing team per value ladder.

18:15So when you've got a value ladder and you say, this is my entry level product. Now these, these are the upsells and downsells that go with that. That's one marketing team for us now, because otherwise you'll, you'll have other things that you acquire, you create, you, you know, that, that come into being and you're ready to launch that. And the marketing team will try because you told them to but it will take away unless you unless you're very sophisticated and have a true chief marketing officer i mean a true when you're paying them 300 000 plus a year you are not going to get the full benefit of that new product or service that you just got or launched and it's painful but but that one marketing team per value ladder one sales team per value ladder has made a big difference, I think, for us.

19:01Yeah. And in the inverse, failing to understand this has cost us, like Roland said, tens of millions of dollars because we thought that one team could do it all. And we can get into if you have actual like, let's say you were to acquire an agency and so it's used to having multiple clients. That could be a slightly different animal because it's built to manage multiple clients, but there's a rule. Let me ask you this. Raise your hand if you like all the agencies that you're using. They all just crush it, right? I don't see. Do I see any hands? I don't see any hands. Yeah. Yeah, so build single-threaded teams.

19:30So what does this mean? It means if you're going to launch a true, an additional new operating entity, a planet, it must have an operator. That person could be a general manager, a president, a CEO. It kind of depends on the size of the company, but it must have a singular operator. It must have somebody who's uniquely focused on growth, which is typically two people, sales and marketing, right? And somebody who's uniquely focused on the customer client experience, Somebody who's focused on product, somebody who's focused on fulfillment, and that may be two people. Okay? They cannot be shared with any other one.

20:07Okay? If you share, if you try to deploy synergies and that's where your cost savings come from, it won't work. Okay? It's just not going to work. If you're even going to launch a new, like Roland said, let's test a new product idea, a new value ladder. So we're going to be testing a new funnel. Great. At that stage, it should have its own dedicated marketer associated with it. And ideally, its own dedicated, maybe it's a CSM, client success manager, that kind of person. I like to have somebody who's uniquely focused on the growth, somebody who's uniquely focused on the product, services, the customer experience.

20:44So build single-threaded teams. Don't share human resources across those channels when it comes to the functional business units around sales, product, marketing. You got it. What you can, and Roland already said this, you can centralize ops and admin. So at the Sun level, at the holding company level, if you do want to have centralized accounting and finance, if you want to centralize HR, there actually are tremendous gains. We will launch a new company. And when we launch a new company or if a company comes into our fold, they might only have six or seven people in that company day one. as soon as they come into our holding company, they now get to benefit from the HR resources of the group.

21:29And so if you know anything about the way health insurance works, somebody goes from basically having no health insurance plan as a business to now being able to tap into a really sophisticated group plan where they get health, vision, dental, 401k matching, all that stuff because they get to write off the group. So it can be very, very effective to bring people into that. and it could be a huge incentive when it comes time to doing both acquisitions and recruitment. So I do like the idea of centralizing ops and admin. Similarly, the goal should be to centralize your tech stack, specifically the core business functions, right?

22:02Your CRM, your ERP. Now, it's not always appropriate day one. And certainly if you're doing acquisition, if you've got some complex customized Salesforce instance or something like that, and you go and buy the business to, we worked with a company one time, we sold a business to a very large company and they had their own custom proprietary tech stack that they demanded that everybody put on. And as soon as they ported this into their tech stack, it just imploded the business. So you gotta be a little bit careful and not necessarily force it on day one, but this should be the goal. It is also, some of these things are important when you're thinking about being acquired because your acquisition criteria as you get bigger and more sophisticated will include that there's a strong preference to acquire companies that are already using the same primary tech stack or at least the biggest parts of it that you're using.

23:00So if you're a Salesforce house or a HubSpot house, you're gonna prefer when you're acquiring to acquire somebody that's got that. When you're looking at being acquired, if you know that the industry standard or you've got some strategic acquirers in mind or you have an idea of who might be acquiring, then think about using the industry standard software. Think about managing your tech stack in a way that will be friendly to theirs because they're going to, when they're looking at valuing you, think about what's fall-off look like. What are the costs of integration? What are the disk synergies that exist so that we're going to have a hard time here?

23:41And so when we're looking at some of these things, that's really helpful. You having a centralized management team, which I think was the last slide, and having a centralized and similar tech stack is going to make a difference in maybe a point or two in your multiple on your valuation. because if multiples are like, say, between six and eight, you want to lean towards eight, and I'm going to push for 10 or 11, but I can't do that if there's too many things that are friction in the integration phase. So think about that. It's not something a lot of people think about, but it is a big advantage when you get to that point.

24:19And here's another thing. Chances are that the industry standard is the industry standard because it's good, because it works. And you might hate it, but you might find that as at scale, and this happens a lot with a lot of the lesser known softwares that we have used that really was like, this is the cool webinar platform because it does this and that and the other and all the big guys don't do that. But as we scale, it breaks because it hasn't stress tested and load tested. And so that's one of the reasons that maybe you might think that some of the bigger tech stacks that bigger companies are using are not that great.

24:59The truth is, is that they're reliable. And at that level, reliability trumps functionality. Yeah, for a lot of the marketing stuff, you can get away with it longer. The one area that I would look to centralize day one is get everybody on the same accounting platform. So if you're using NetSuite internally and you acquire a company and they're on QuickBooks, then you got to convert them over. If somebody's on FreshBooks and you're on, you get the idea. try to get everybody on that same because that's an apples to apples and finance and accounting is where you really want to make sure you're always comparing apples to apples um similarly also uh it's it's never perfect but the more your chart of accounts can be similar across especially if you're in similar industries that's going to be big as well and allow you to compare the performance and gross margins and things like that across all your different business units to know which ones are worthy of additional capital investment and also if this sounds like i don't know what chart of accounts is and that kind of stuff.

25:54You honestly don't need to. You just need to know that these things are important so that the people who are in charge of that in your company do know that and that you at least know to hold them accountable to these things. So I would strongly recommend you not to go deep into any of the functions you don't already know. You want to be a CEO. You want to be a manager. You want to be a leader. Stay out of the weeds, but know enough to ask the people who are working for you if these things are happening. Yeah, it's not your job to have all the answers. It is your job to ask the questions. I absolve you.