Podcast: Business Partner Dynamics' Impact on M&A, an Interview with Corey Northcutt
Office politics have a far-greater reach when it's between partners. Learn how to protect yourself in this podcast with Corey Northcutt.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Corey Northcutt is CEO of Northcutt, a Cloud and SEO agency. Corey began his time in entrepreneurship with Ubiquiti, doing web hosting. After growing the business to a massive corporate giant, he sold his shares. He took his lessons from Ubiquiti and began SEO consulting. Northcutt believes that SEO & content marketing should be driven by science, math, and ROI and specializes in cloud services (SaaS, PaaS, IaaS) and e-commerce.
If you listen, you will learn:
- The beginnings of Ubiquiti.
- How Corey pivoted into other services.
- Why Corey chose his first business partner.
- When Ubiquiti merged with one of its clients and two more partners joined the team.
- The benefits of catering to a niche market.
- The initial partnership structure Corey and his partners used.
- The issues Corey and his partners had.
- Lessons Corey learned from dealing with potential buyers.
- The cracks that appeared within the partners’ relationship.
- The toxic environment that developed during the sales process.
- How Corey left the company.
- Life after the buy-out.
- The lessons Corey took from his time at Ubiquiti.
- Why does Corey choose not to work from an office?
- Corey’s advice to the audience.
Announcer: Welcome to Life After Business, the podcast where your host Ryan Tansom brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Welcome back to the life after business podcast. This is episode 94. What would happen right now if you and your business partner got in a disagreement about the future value of the business, how to exit and who is deserved what? Well, that's exactly why I have Corey Northcutt on the show today because corey had three other partners who all had 25 percent equity and Corey got to a point after he started the business, brought on a partner which was in the web hosting business back when it was a hot commodity. They then grew the business and merged with the data center or they all had a fourth share of the business and all of the partners had different opinions about what it was worth, what they wanted to do with the business and then how everybody should get out. And Corey was extremely open and honest about the challenges that he went through and how everything unfolded and why he ended up exiting the business. So I really believe that this is a must listen to because we've had some amazing stories on the show about how amazing it can be with great communication and Corey was kind enough to come on and share some of the stuff in the major challenges that he went through. So I really hope you enjoyed the episode. So without further ado, here's my episode with Corey Northcutt.
Announcer: This episode of Life After Business is brought to you by Solidity Financial's, growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the right buyer at the price you want.
Ryan Tansom: Corey. Good afternoon. How are you doing?
Corey Northcutt: Pretty Great. How are you doing?
Ryan Tansom: Doing good, man. I'm glad we got connected through our awesome YEC network and we've also had some fun, mutual connections that'll be interesting as this story surfaces, but you had a pretty cool story and you reached out and we're more than happy to share on the show, which I'm excited to hear some of the inner workings of what you've done so far, but for the listeners that don't know you or your background, can you give us a little bit of background on, you know, how does it that you became an entrepreneur? What was the set of circumstances that you found yourself running a business?
Corey Northcutt: Yeah, absolutely. So my, I guess track into becoming an entrepreneur was a complete accident, which apparently is a pretty common story in the space. Like I didn't. I think I always knew I would do something, but it kind of took me by surprise. Right. So I grew up around family businesses. I always thought, you know, I can take her, I can do this. Like I could watch my dad fix appliances and run simple businesses. I could do it too, but in my case I started a web hosting company in what, 2004, and it's uh, everyone was doing it back then. I think it's, it's a stretch to say it was a web hosting company because you could go to Go Daddy, you can spend $5 and they'll let you host a couple extra accounts, right? So it grew very, very quickly and by accident until, I don't know, I mean we can dig into the story here, but I ended up taking on more partners, merging with other businesses. It got big and grew into this wild hydra of brands before I finally just said enough and just wiped the slate clean in 2010. So.
Ryan Tansom: And I think that's interesting because, you know, I'd say probably a good chunk of our listeners, I totally get the web hosting and some of them that don't, you know, sort of how, how exactly.. with you growing that fast, how were you growing up fast and what were the actual services that you were providing?
Corey Northcutt: Yeah. So at the beginning it was just web hosting. We got a website, local businesses, uh, you know, the coffee shop that I hung out in, just people from around, uh, that doesn't generate a ton of revenue, right? It's spending $5 to make $5 a month each time. So there were quite a few pivots as we were growing that business it, I guess today they call it 'growth hacking.' I think it's kind of a stupid description of just looking for opportunity and kind of adjusting your business for it. I do SEO and inbound marketing now, but, you know, even though that was central, I think at every stage of the game it was really those shifts in vision for the business as a whole that probably deserves the majority of the credit and then it just kind of what we did with it. So we started out doing regular web hosting and it grew into the whole suite of services that were related, but you know, in IT, you can do that. So there were, ran out whole servers to people or just sell them some bandwidth. Um, so there was a lot going on there.
Ryan Tansom: I think it's such an interesting ability to the, as you're just selling one service, is to pivot because you've got the customer base that you've got sitting at your fingertips and were you guys actually, you know, purchasing servers and then putting them on site? Or were you just relicensing and supporting the people originally, how did you actually end up getting into that particular space?
Corey Northcutt: Well, after a while, we were. So we realized after a bit, um, so after about a year I took on my first partner and one thing we realized pretty quickly was we would much rather rent out dedicated service to people instead of five or ten dollars a month. They cost $2-300 a month. Some people will pay a lot more than that, especially if they use a lot of bandwidth. There's certain applications for server that use a lot more bandwidth than just hosting a website, for example. So we spent a lot of time on chat forums at first and we realized, Hey, we have this guy who's actually got a pretty good deal on this in Chicago. He's a terrible communicator. A really nice guy, so we can kind of lead the charge for him. We can sell his product and resell it instead of just going from Go Daddy like everybody else.
Corey Northcutt: Right? So that takes off. And before too long we built a whole cabinet of servers. I'm doing pretty well and I'm actually starting to consider leaving my part time job at the time, uh, that continues to grow. We get approached by a data center in Cedar Falls, Iowa, CutScene Technologies that said, you know what? We see what you're doing. We have this brand new facility, we need somebody to fill it. So they pull us in there, and... this is something that people who aren't really in the telecom world are probably familiar with, but not all bandwidth is created equal, right? Like most people just get their local internet from Comcast or whatever now. But on the data center side, there were a lot of providers and some of them are considered really bottom-barrel at the time it was a company called CoGen. Nobody wanted to touch CoGen.
Corey Northcutt: They would go out of their way to make sure if they rented a server, it didn't have CoGen. Obviously we were renting out CoGen bandwidth in our first business. It was cheap and just had a bad reputation. They just kind of had some big cut, some corners maybe, I don't know. Um, but this facility that approached us was on the absolute polar end of the spectrum. Uh, they were licensing internet bandwidth, which was, if that could be more opposite, it was, and it was really expensive to get it. But what they told us was, we've got all this bandwidth and nobody to use it. We need somebody to fill our commitments and ramp this up really quickly. So obviously we said yes. We drove out to Cedar Falls. We got everything set up there. It was amazing. It was amazing for us, anyway. It seemed like it was for them. We filled up a whole bunch of racks of servers in their facility. We didn't have a contract and this is just month-to-month that they just had, you know, all this excess capacity to fill. We were doing a great job of filling it until one day they said, you guys have to get out of here in two weeks.
Ryan Tansom: Wow, first of all. I'm sure there was some... Let's peel that back. There's some other stuff I want to make sure we go back to, too. Um, but like, so what was the timeframe that you guys were in that data center?
Corey Northcutt: So that was our first couple of years and that really jump started things I think.
Ryan Tansom: Okay. So maybe we'll just take that in chunks. I mean, go back to the... Why did you actually end up getting a partner? That partner that you had? Was there a reason? Was their skillsets he provide funding or mark different kinds of expertise or something?
Corey Northcutt: Sure. Well, the deal was he would run the service, uh, that got me off or Go Daddy. I was the marketer. I was the growth person basically in the equation.
Ryan Tansom: Did you guys, was there any kind of way you valued the business then or was it just like, hey, like handshake deal, I'm going to give you some equity or, and we're going to split, you know, sweat, sweat and labor, time and materials and stuff, or how it was... Was there any kind of formal way that you guys went about it?
Corey Northcutt: That was pretty casual. We registered an LLP. At that point, I don't think we even had an operating agreement. It was pretty, pretty crude, you know, we had like a joint bank account for the business and that was it. It wasn't something that either of us even saw as a business yet. I think it was, it was more of a hobby.
Ryan Tansom: So when did it become a business in your eyes?
Corey Northcutt: Well, at that point, I guess by the time we moved in with the Team Technologies, it was looking like, okay, this is going to grow into something that is going to be a longterm project. This isn't just kind of screwing around on the Internet anymore, like I've done my whole life. Uh, it still wasn't a full-time thing. It was probably not until 2007 when we ended up merging with a client of ours and I took out two more business partners that we took the whole thing full-time.
Ryan Tansom: So is that, is that after the data center arrangement and then you guys got the boot?
Corey Northcutt: It was immediately after, actually. So we got the boot. We ended up coming into a situation. We moved back to Chicago. We moved into a facility with Steadfast Networks, here. They're actually a client of our agency even now. Uh, so I've, I've had a really good relationship with them ever since. They never kicked me out of their data center. All-around good people. Uh, so yeah, we ended up merging with a client of ours and they did Ventrillo hosting, which isn't even an industry anymore, I don't think. And I don't know if you're familiar. I think most people won't be. Actually I barely was. It was a huge industry at the time though, where basically we're using Zoom to do a podcast right now. There are a million different options for audio chat today. You've got Skype, you've got, I mean 10 million... and half of them are free. At the time it wasn't the case, and this was a really niche thing specifically for kids playing World of Warcraft.
Corey Northcutt: Uh, it's big in all the e-sports, but mostly it was all about World of Warcraft where you'd have a guild of 50 kids all on one chat. [Ryan interjects: Oh my gosh]. And they needed a way to kind of control it, right? You can't have 50 people talking at once. So again, it was very niche and nuanced and they would all throw in. In fact, the company developed an application just called Guild Pay so they can all throw in a dollar and they would all have this, you know, $50 a month server. It was a huge thing and it had grown explosively for them. We were their supplier in one city, but they decided that they wanted to grow into six different cities. They didn't have good vendors in those locations. They also recognized that if they did have a little bit more control of their infrastructure, uh, somebody that can rent them really high bandwidth servers, like we were doing, that they would get a cut of that, too. And it was just better all around, right?
Ryan Tansom: Such an interesting landscape because it kind of taken me back in probably a lot of other people in all this, how fragmented it all was and we... can we go back? I'm just kinda curious on the data part. So, so were you in there for a few years or what was the timeframe that you said you were in that?
Corey Northcutt: So 2005 to 2007.
Ryan Tansom: So did your revenues just skyrocket? Because I mean, so explain to the listeners because they built, they built it and they thought people were gonna come and you were the traffic, right? So it was, it made sense on the outside, right? And how, how did your revenues change and did you have to build an infrastructure to support what that volume brought and then did that lead into you needing to merge or you wanting to merge?
Corey Northcutt: Oh I see, so after the merger, what happened?
Ryan Tansom: No, no, no. So I'm saying I'm thinking like, you know with the, the, the Team Technologies, the data center in Cedar Rapids. I mean, so you didn't have a contract with them I think, which is a lot of, a lot of times people struggle with that is they're grown their companies and they're, you know, these opportunities kind of fly at them and they just don't realize the ramifications as things go south or they get kicked out, right? So did you, did that... did the original data center engagement change your revenue structure and did it spike revenues and did you have to build an infrastructure so when they said, "hey, you got to leave," they kind of precipitated the talks with the, you know, merging with that client of yours.
Corey Northcutt: I don't think so. It came afterwards enough to where I would say they're unrelated, but that time in Iowa I think did grow our business significantly because it gave us a better product. We were able to just pop in front of new eyeballs and say, "Hey, look at what we've got here." Like this is really, it's a lot of bandwidth, but it's high-end bandwidth which has a value proposition that no one else can really replicate at the time.
Ryan Tansom: And then your client came to, you know, what, what, what actually triggered the urge then? Was it something that they obviously needed the services or you know, what, what did they bring to the table that you wouldn't have just kept them as a client?
Corey Northcutt: Well, there were a bigger company for one, uh, significantly so. But they also saw that their market was trending downwards while ours was trending upwards. So I think everybody got something different out of the merger. And I still to this day kind of question what everyone's motives were at the time. But there were definite pros all over the map. In my partner and I's case, we were quitting our part time jobs, but it means that this company is big enough and has enough streams of revenue to where we feel pretty good going all-in with this. It also meant that we could expand our lines of business in a new way and we had a new value proposition, which actually fits beautifully with our name, which was Ubiquity. The word means you exist everywhere. Our tagline was 'everywhere, always.' But we weren't everywhere. We were just in Chicago.
Corey Northcutt: So the way that we got around that was we took all of the servers they were renting in Seattle, Los Angeles, Dallas, Atlanta and New York, and we put them into Ubiquity facilities, we called them. So we ended up moving them into co-located data centers on our own equipment and each of these markets. And we started selling a solution that allowed any provider to do this. So people like CDNs, were just springing up at the time, uh, people with content delivery networks. You've got game server providers, you've got voiceover IP providers that all have a reason to have a lot of high quality bandwidth in multiple cities. I think after this company that IBM acquired called SoftLayer was maybe the second company I saw have this same business model and obviously they did it bigger and better than we did, but I think there was something to it.
Ryan Tansom: Well, I think it kind of shows how fragmented the the services were and it was the customers and the needs that were driving the kind of the situations. And so when they brought all the equipment and you're bringing some of that, you were bringing the servers and the bandwidth, did they have like a bunch of assets? So like when you, when you guys merged together, how did you get his value it? How did you guys separate the equity and the partnerships? I mean did they have assets and you had customers and just kind of curious, when you take two different business models like that that are, that are trending in different directions, how did that whole things get structured?
Corey Northcutt: Not as a professionally or elegantly as they're probably hoping to hear. We literally just split it up four ways. So four equal parts and there, there wasn't much science. I think it's through just the utter chaos of it all, but I think it, it kind of worked out eventually, like Ubiquity did become a bigger company than Dark Star company that we merged into, but at the time that shared it and look that way. So for me, yeah, like I'm much, I'm going to have share of a much larger company that looks pretty good. For them it was, well this company is not even probably going to exist in a couple of years, so I want one that looks like it's going to stick around and we have a way to kind of build that. So again, everybody kind of expected something different but it was so chaotic, I don't think any of us went through the thought process of just trying to come up with a reasonable valuation.
Ryan Tansom: What would you have done differently starting there now that you've kinda gone through it?
Corey Northcutt: I don't think I would have done it much differently only because I don't know the answer there and maybe you have some ideas of what could have happened there, but in our case, I mean we had an operating agreement and the one thing that ended up saving everything when everything kind of melted down later, we added one line to the operating agreement that wasn't like boilerplate, which is just simply if any partner spends more than $100, which to us seemed like a lot of money at the time that they have to get everybody else's approval. Which just meant that, yeah, we've got this big multi-headed hydra of a lot of partners, just make sure everybody was in agreement on where we're going. That was something that I think it wasn't as respected or organized as we grew and there's maybe not the equity share, but a lot more just operationally. I think that would be more where I would have looked.
Ryan Tansom: I, the operating agreement is something that a lot of people don't put a ton of weight on until they realize that it's not as tight as they needed to needed it to be until they have disagreements. And, and you know, as you guys continued, what was the main vision as you guys? Okay. So you split it all four ways and it was kind of like you said through the chaos and all the different motives. What was the vision? Did you guys have like a bigger vision of what you were trying to accomplish and how did you guys start planning for the future? Was there any kind of end in mind or was there... What was some of the major milestones that you guys had as a group?
Corey Northcutt: No, nobody discussed them aloud. And I guess if there's one thing that I would have done differently, I probably would have been that. So I think everyone had a different end in mind, but we had one partner who just, he loved his lifestyle that you would have kept it going. Never even dreamed of exiting. W we had another that just, you know, buying sports cars. That was it. And you know, there's another still that was like I'm going to flip this company in a year, I'm going to go to work for somebody else. And I mean we were all young too, like I was still in college while this was going on. So I think that's something that is very important now that like if you have multiple partners that they are in absolute agreement of where are we going? We didn't have that.
Ryan Tansom: So how did that impact like in which is so common core. I mean like even big companies where everybody has got different motives in this never been talked about and what people want. And so how did that, how did that impact your decisions on what you're going to spend? I mean I'm assuming the board sports cars were on the personal bucket because it's probably more than 100 bucks and like how did that impact like your strategic vision and how you're doing investing in back into the business? Because I think, I mean, I'm assuming was there tension and conflict as you guys were going through that?
Corey Northcutt: Well, we still basically had two partners... We were basically two companies, so we two partners running DarkStar. We had two partners running Ubiquity. Um, there was a little bit of crossover and that is obviously where it started to get a little weird, but it was a decent system of having two partners with equal say it can be a challenge when you don't have a tie breaker. I think that that was something that as we reached the end of my time there, it became more of a thing and I think that's something that could go better, but operationally it was just day-by-day and we just hoped that we'd reached an agreement and it became even less about the partners because only myself and my original partner worked out at the same office with most of our staff. So we would usually pull in staff and get their opinions. But then it becomes political, right? This is your staff member so they know where their bread gets buttered or, or whatever.
Ryan Tansom: What was your, what was the structure like? What kind of staff did you have at that point?
Corey Northcutt: Well, we had 25 full-time people in total and near the end there, so in a web hosting company or really any service company, it's mostly support. Answering tickets. We had five people dedicated to facilities in each city just doing onsite work and one person leading each of those teams so a head of support and a head of facilities and the rest were outliers. We had like a, a network administrator and a salesperson.
Ryan Tansom: Which in that time too is, I'm assuming a lot of those people are very hard hires to find with that kind of skill set that can communicate and do that. I see that I kind of had some of those same labor pool I was trying to pull from and it's always a main, very difficult challenge.
Corey Northcutt: Completely homegrown. One of our people actually came from being homeless into [Ryan interjects: Shut up!]. No joke.
Ryan Tansom: How did you find him?
Corey Northcutt: We didn't. He was actually a... He was close with one of the partners that was on the other side, on the Dark Star side. So yeah, that's kinda how it went, like we had just kind of thrown him some work on the Internet, you know, just freelance realized like, Hey, they're, they're really into this, like they're reliable and they're passionate about it. So I just kept teaching him and...
Ryan Tansom: Crazy. That's awesome. Really cool story.
Corey Northcutt: It definitely goes against any type of anything you hear about HR or whatever, but it worked out.
Ryan Tansom: That's awesome. Yeah, a lot different than trying to pick off the MBA people that are like, you know, automatically asking for a bunch of money and have no experience because they've never worked in the, in the working environment before. So what did you guys like? What was the major milestones that you were marching towards? Did you have, you know, kind contracts? How would you, I mean, were you measuring EBITDA? What were like the judging KPIs that you were measuring as you guys were drawn?
Corey Northcutt: So we had a few events is as years passed the merger where people did offer to buy us. That was actually where all of us learned for the first time. I think about the, the EBITDA model and how businesses get valued. But I think in our case it wasn't even very flattering because our margins in that business were razor thin and I think that's just the nature of, of hosting. It's like, can I offer an account for $4 instead of $5? We're gonna do it then. And that makes that world a little bit tricky. So we had a few offers and that was just by whatever methods they threw at us, we kind of considered.
Ryan Tansom: How did they come across you in? Why were they actually knocking on your door?
Corey Northcutt: Uh, well there was a few and I think I, I've got to be careful there because I think there were probably NDAs or something, but it was just different synergies sorta like what put us together with the partner that we merged with where people are developing a technology on the game-hosting side was interesting. People were coming up with different solutions, like e-sports was just taking off. So we had people developing different network services, that sort of thing, which was very attractive. We also, on the Ubiquity side, it's all about economies of scale when you get into data centers. So just like Team Technology just kind of used us for a little bit to up their bandwidth numbers until they could get a really high paying customer in there. That mentality is pretty key. Now we got another offer from somebody who ran a merchant provider said, well I like Dark Star like 20,000 clients. Ubiquity had thousands as well. So the fact that you have a whole lot of small transactions means that would be great for my fees. That's leverage for me. It just, if you use my payment processor. So everyone kinda had their own angle.
Ryan Tansom: Interesting. Did you- like as you're going to these different than when you say that you got these offers, did you go through the full due diligence in there? So maybe the context I'm asking this in, Corey, is that I think a lot of entrepreneurs in the circles that we run into or any of them, they, you know, these offers come flying out of the blue whether it's from strategic buyers or investors or whatever, and they're crazy distracting because people go through different links or different, you know, like how, how long they go through the process before they realize it's not a fit. I mean, did you learn anything? How far did you go down before you started actually getting the offers?
Corey Northcutt: Yeah. So, I mean we did some basic diligence for a few people. It was enough to, uh, I guess firstly make us really look at our bookkeeping practices a little bit more deeply. Uh, we ended up looking at external bookkeepers for the first time ever. I had never really had a reason to do that. But people care about your financials it turns out when they're looking to spend an extreme amount of money to purchase you.
Ryan Tansom: What were some of the things that you cleaned up or that you, that you've found that you didn't have clean when you were getting questioned?
Corey Northcutt: Just the reporting in general. There was very, very little. Um, we were, you know, tracking one business bank account with a few business credit cards. Obviously we can show profit and loss there, but, you know, we didn't have a balance sheet. We didn't have it vetted by a third party, which was important to a few of the people we spoke with anyway. So just having somebody audit it who is not a partner.
Ryan Tansom: Yup. Other than the financials, I mean, did you know, was it contracts, was it like service agreements or other things that you pulling up and was it distracting for you and the partners as you're going through this while trying to run the business?
Corey Northcutt: Uh, to an extent. Yeah. Uh, and it's not something that we've got too deep into I guess when we were fielding outside offers, but yeah, like every time a request comes in and that's one day that you're not working on growing the business that you're working on, just diving in and you know, formatting things for people. So it factors in, for sure.
Ryan Tansom: How did you guys as a team in with, especially when, as you mentioned that you have four partners, but kind of you found out were different motives, as you're starting to get a little bit of a taste of a different perspective of your business, how did perceptions change or did you start to see different motives come out of that? Was there revelations throughout some of these processes?
Corey Northcutt: Yeah, I think that even more than the process, they're like, yeah, I got everyone talking for sure really for the first time and we all kind of came up with our number, right? Like, it's, I don't know if I can say this on here. You've got the expression, 'fuck you' money. Right?
Ryan Tansom: What did that mean to you? Because I think it means something different to everybody, but I'm curious because yeah, I think there's a lot of entrepreneurs that that's what we all want and it means something differently to everybody.
Corey Northcutt: Sure. And to us we were greedy, like we looked at it. It's like based on nothing at all. I'm like, I'll take $20 million. That's cool. Like I can see we're explosive growth, we're going to be huge and obviously most buyers are just not going to go along with that. Uh, but that was our first thought. It was my first thought, um, had other partners that, you know, it's like, well, I just want to get acquired and I really want them just to put me on salary, uh, I want to work for them and to me that sounds like the worst thing ever.
Ryan Tansom: Take all this risk and go work for someone.
Corey Northcutt: Yeah, exactly. So is that really the end game? And it certainly got almost thinking in that regard and everyone had a different answer.
Ryan Tansom: How did you reconcile that?
Corey Northcutt: We didn't, uh, about a year later, I ended up selling my share and doing things my way. So.
Ryan Tansom: I think you call it the four headed hydra. That's a pretty interesting way to describe it. Like what were the conversations like? I mean, did tensions start to rise as you were starting to realize that everybody's got different motives? I mean then like how did you, what did that do to the conversations and dialogue with you and your partners?
Corey Northcutt: Well, it turned into Game of Thrones for different partners with like four different camps of staff that they brought in. One partner had his whole family and working for the company at one time, uh, everyone kind of had these allegiances so it, it started to get really odd at near the end, like two partners were clear about wanting to get rid of another partner and then I think I had conversations at one time or another with every single team member about getting rid of somebody else, it was somebody different and it was really toxic, right?
Ryan Tansom: What were the reasons to get rid of the people it was to increase EBITDA or just to try and get ownership over that. Like what was the purpose?
Corey Northcutt: It was different every time. We had one partner that I think was the first one that I started hearing about that was just, they said, well I think he's kind of lazy. And the reality was he had actually written most of the company's systems. He was the one that was like, well, I'd love to be able to just do my thing and we'll run this forever, right? He wasn't necessarily building toward something, but he was, he was a developer. He liked to work third shift, most nights. I don't think we usually saw most of what he did and I don't think he was really into communicating it, because he never really had to. You know, looking back I give him a lot of credit. I think he was a huge contribution to the company, but then we had other situations, too. We had a data center give us an offer to move in. They offered us equity. I had one partner that said, well we should cut out the other partner because I had just because we can in that deal and just move our stuff in there, but we'll start a new company and only we'll take the equity. It's like, well that, that seems shady.
Ryan Tansom: A couple other words I could think of.
Corey Northcutt: Yeah. So that conversation happened. Then I had another one where, uh, you know, I think ultimately a conversation was had where I was on the other end of this, too, that I never heard, but I had that flip side of "I just don't think we need this many partners, so maybe we can kind of push them out. Maybe we can just, you know, we'll cut their salary. It will be our word against theirs and what are they going to do?"
Ryan Tansom: So how are you coping with that?
Corey Northcutt: Badly. I was not sleeping much. It was, it was awful. That was the year that the movie The Social Network came out. You remember with Mark Zuckerberg. You got that expression now, 'he's Zuckerberging me'. And I watched it, and I thought it was a Disney movie, like it was freaking- like nothing compared to my life at the time, which was just a nightmare. So yeah, one day I got a letter in the mail, uh, the company moved to a different state and I was getting looped into less and less as this was happening and I'm not an idiot. I see all these conversations have been happening for a year and a half now about different people every time. Like I, I know what people's motives are, which has just given me more... and yeah.
Ryan Tansom: Did you guys... like, everybody, with all the different, you know, motives, did you guys have like a dollar amount that you thought the company was worth? That was worth all this crap or like was there, was there enough to fight over or, you know, how did you, I mean, does that make sense?
Corey Northcutt: Yeah, it does. Uh, and yes, I think it was, and we had a dollar amount, actually a few different dollar amounts from people that had made us offers already. So that helped. It's, it is some extra validation. It's not necessarily this is the model to value of our company and I'm not sure everyone, anyone ever actually gets that right? Like everyone has different models and they say, well we should use trailing 12 months or we should use the last three years and people kind of negotiate that way and what I've seen, but we had a few offers and I think that kind of set the basis.
Ryan Tansom: What were the ways that they ended up valuing your company?
Corey Northcutt: You know, I don't even know. Uh, it, uh, the original offer that we were introduced to the EBITDA, which I think just must have been a incredible multiplier because our margins were just super, super slim. Uh, so I think it was just closer to gross revenue is what became down to.
Ryan Tansom: Well, and I'm assuming based on your, your old industry that because of the sheer quantity of customers that you have, it's a strategic purchase because people want the access to those customers and yeah, it's a little bit different than going off of a, you know, a discounted cash flow or multiple EBITDA, because people can make money so fast if they had that customer list.
Corey Northcutt: It's the customer list. It's the contract leverage, too.
Ryan Tansom: And can you, can you expand on that?
Corey Northcutt: Sure. So when you run a data center, let's say you purchased bandwidth from AT&T, they're a provider most people probably know. You pay a rate that gets calculated per megabit per second. So that's completely changed. Now it's become a lot more efficient. You know, you might have 100 megabit per second from Comcast, right? A data center will have 8 gigabits per second or 10 gigabits per second in larger increments and they call it a commitment, so they have ramp pricing where they say, okay, if you buy 10 gigabits from us, you get this price per megabit, you buy more, it gets cheaper and you use your economies of scale that way. You do it for bandwidth, you do it for space and facilities, you do it for hardware pretty much across the whole spectrum of IT. The bigger you are the easier it is to play. So it really, really rewards economies a scale.
Ryan Tansom: The Amazon model through-and-through.
Corey Northcutt: Right. Pretty Much.
Ryan Tansom: So. You know when you've gone back to the partnership stuff, so as you're struggling with this emotionally and you get these dollar amounts and the toxic warfare going on internally, I mean, what way did you see out of that? I mean how, I mean I'm assuming you're racking your brain every single night making, you know as you're going through scenarios, what are the scenarios that you thought of that you thought through and that you... And then what happened when you finally had enough?
Corey Northcutt: Well, I reached the point where I couldn't get my business partners to speak to me, getting them to answer messages the right way to deal with it would have just been to have a conversation, but I couldn't get that to happen. You mentioned the idea of were people buying and sports cars with their personal money. No, a couple of them went on the company credit card, too. Near the end, here. It was getting messy, so finally they moved the office to a different state. I'm not involved in that conversation at all, which is pretty crazy. My office shares a wall with one of my partners in the months leading up to that. Oh my gosh. I think the reason was specifically so they didn't have to have conversation with me like this was not something that they wanted to look me in the eyes and it's awful, but that was the situation we were in.
Corey Northcutt: Like they avoided any conversation about this until the company moved to Arizona. I get a letter from someone's real estate attorney that had like three bullet points in it. It said your salary has been reduced from like a nice six figure salary to like 20 grand a year. You still have health benefits was the second one, which I think legally they have to at that point. And the third bullet point was you do not require access to any of the company's systems to do your job. [Ryan interjects: What the heck!] Yeah, three bullet point letter.
Ryan Tansom: Your blood must have been boiling.
Corey Northcutt: Yeah. Especially when considering I wrote most of the systems that I was being locked out of. It was my company. I was employee number one, even before I took in the second partner. In my mind, like I registered the domain. They actually broke into my personal GoDaddy account and managed to socially engineer the domain away.
Ryan Tansom: What was so off with you and them? Like was it vision or what you were trying to do? I mean like what, what, what was that?
Corey Northcutt: Greed? You know, they had conversations about flipping it. I've heard from employees since then that they immediately were talking about flipping it. That, you know, in the weeks after they moved to Arizona, but they thought that if they got me out, I think that they would be able to take the majority, um, and everybody thought they deserved more than somebody else for whatever reason, which, you know, maybe that can be argued by somebody, but it's, it was pretty rough. So I ended up finally getting a lawyer involved at that point. He said, you know, normally I advise business partners to work this stuff out between each other. Like it's gonna get really expensive if you get lawyers involved. But in this case I can see that you've been trying, like I can see all your emails and all your documentation to try to get them to talk to you and they're not.
Corey Northcutt: So I do think you need to file a lawsuit to get their attention. But in the same breath said, then I think we need to talk about settling, which I hadn't even thought about. And by settling he said, I think you need to think about cashing out, which. Yeah, like this whole time, up until that moment, the only thing in my mind was there's got to be some way to fix this, to get people to be reasonable again. And you know, he was right. There was no putting it back together after that. There's no way that everybody sits down in the same office and is happy working with each other again. So that ended up being... Yeah, that was it.
Ryan Tansom: So what was like, how did that, how did everything unfold there? I mean, did you, did you... did you settle? Did you go to court? How did you come up with what you were owed and how to get paid?
Corey Northcutt: Yeah, so we, we settled, it happened pretty quick. We just exchanged emails.
Ryan Tansom: No kidding. After all that, after all that.
Corey Northcutt: After all that. Yep.
Ryan Tansom: Did you say it... Did you take like one of the dollar amounts that you guys had gotten in the past and said, this is a fourth of that and give it to me now, or how did you, how did you work that out?
Corey Northcutt: That was exactly how I approached the conversation. I just referenced an offer that we had before. I said, let's just give me 25 percent of that. That's good. I'm happy then.
Ryan Tansom: Did they agreed on it?
Corey Northcutt: On the second try. Yeah, they kicked back 'no', I said 'yes' and then they said yes.
Ryan Tansom: Did he cut you a check? I mean, I'm assuming if you're going to do that, you want to literally cut ties so that way they can't screw with you anymore. I mean, how did they go get financing? Did they have enough cash to, to, to write a check like that?
Corey Northcutt: I don't think I'm allowed to talk about actual terms, but it, it ended up working out I guess is all I can say there.
Ryan Tansom: Right. Well, which I think is just, you know, for the listeners, I think it's just important to because it's, you know, on the. If you got anything you thing that you can actually disclose on it and there's a lot of situations where it seems like they're going to get the money, but there's a lot of "oh yeah, I got yas" after the fact because of incorrectly written earnouts or promissory notes or employment contracts and stuff that there's a lot of, lot of potholes that people need to be concerned about it. So it's not just about like agreeing on a dollar amount because there's a lot of other things to take into consideration. [Corey interjects: Sure.] So, um, you know, when you look back at going through all that, first of all, what did you do after that all got settled? I mean, did you spend some time reflecting and like trying to figure it out? Or did you... I mean, you must have been emotionally beaten down. I mean, that's just how did you, how did you work through that?
Corey Northcutt: Yeah, I was. So I thought, yeah, I'm going to take some time off. I'm just gonna do some SEO on some websites. I'm just gonna pretty much just live my life now in a way that is nothing like that, which it, you know, the past couple of years it got me thinking like, what, what would be ideal here? It's certainly not politics in a company environment like that. So I ended up going to visit a friend of mine in the Caribbean. He was actually an archeologist down there and uh, I ended up staying in this old port with him for a couple of weeks, but I already had old competitors emailing me, asking for help specifically with SEO because we were really, really good at SEO. So our old company ranked for Linux hosting, like all these other two-word phrases like page one for just dedicated servers for a long time. And that was awesome. Um, so I ended up taking a few consulting agreements. Those people started referring me business themselves, their own competitors. So we ended up just kind of, or I ended up building a company again by accident from that. And here I am, it's been, I guess seven years since all of that happens and now I have a marketing agency which is much more profitable than my first company. And it's, I'm happy I have no drama.
Ryan Tansom: Let me get, let me ask: do you have four partners?
Corey Northcutt: I don't have four partners.
Ryan Tansom: Wow. When you, when you were sitting in the Caribbean and you were thinking about this stuff or even over the last seven years Corey, because there's a lot of business owners that have partners and they get into it because there's random circumstances that they leverage each other and then they outgrow each other's... you know, life happens and their outcomes and their desires change. When you were sitting there thinking about how you could have potentially got, did something differently, I mean, is there anything in the partnerships that you learned, maybe not that you would've done differently because you probably learned a lot and you've reflected on it, so is there anything that you learned from it that you did differently this time or for the listeners you would just say, hey, you know what, here's how you approach something like that?
Corey Northcutt: Oh sure. So I did a lot differently. I think that all this stuff you've learned the most just by doing in every manner of running a business. So I got a bookkeeper involved, have really cleaned finances and everything's nice and organized. I do actually know how to value an agency now. I know that at three point five times EBIT is pretty standard for where I'm at right now. I learned that really we should have been classified as an S corporation probably on the last go, too, so I figured that out to just the different advantages of structuring a business. So yeah, everything's all new and it's just, it's amazing. Like I never would have expected I would have been right back where I was. At the time it was like, you know, like the world was ending, but somehow everything ended up better for it.
Ryan Tansom: With your agency now, are you looking to the end in mind knowing at least what your options are at any given point? Because I mean it sounds like you're obviously running a good scorecard where you got some evaluations and I mean yeah, you kind of always looking at the landscape and looking towards what your options might be compared to just kind of going day-to-day like you were before.
Corey Northcutt: Well, yeah, of course I'm happy where I am, but I think you definitely have to look out for this opportunity. I've had similar conversations in this business, which I think is a good sign. None that have been really where I want to be, but I can at least project, hey, you know, what, if I hit a number, hit a scale or if whatever reason, you know, life throws me a curve ball and just like, I don't love doing this anymore. Like I absolutely know the way out.
Ryan Tansom: I'm assuming. How are you with the people that you surrounded with before versus now, is there certain things that you do with your clients or employees or partnerships or something like that to make sure that you really liked the people? Because I think there's a lot of people that are out there that get into relationships that they didn't mean to or they can put up all the crap that they don't wish. How are you and your, you're, you're, your a quality scale must be pretty high. And how do you guys go through that, personally?
Corey Northcutt: Yeah, that was really important to me actually. As I started to research, uh, just what makes people unhappy with their job because I was pretty unhappy at the end there by last business and uh, you know, the thing that stops us about every list is interference in people's personal lives. And I found that it's pretty true. You know, I was, I was losing a lot of sleep at night. Yeah. That was worrying about, you know, what move is someone else going to pull and you know, what am I going to have to do to make that right. And the first decision I made was no office. Everyone's remote. Uh, there's no commute, there's no who didn't clean the coffee maker. There's no sending passive-aggressive emails. How can I have minimum absolutely like any type of employee drama. Like if I can cut it out, I'm going to do it. We lose clients for it. I know there's definitely people who want like the old school agency, like madman experience. I am glad to just say goodbye to those clients just so like politics cannot beat it's way back into my life. So that's been huge.
Ryan Tansom: Just the freedom from that. Drama can just suck you down on every aspect.
Corey Northcutt: It really does, and much more than you realize.
Ryan Tansom: Especially going through what you've gone through. That's, that's a. that's a lot of it all at once too.
Corey Northcutt: Yeah.
Ryan Tansom: So if we were to highlight one thing that you've kind of talked through or you know, one thing that we maybe haven't hit, is there something that you'd leave the listeners with that you want to make sure that you're really accentuate?
Corey Northcutt: Yeah. I wouldn't stress too much if you don't really know like where you're going to be tomorrow. It, it really helps to know what your business is worth and all that, but things have a way of working out.
Ryan Tansom: Well said. I think that's uh... and there's a lot of entrepreneurs, that's how we live, but knowing, knowing the foundation and knowing if something knocks is also, like you said, super important, which you said, I mean you obviously have that stuff readily at hand, so it's important. And it allows you to kind of relieve that stress I think as well. Definitely. What's the best way for listeners to get in touch with you?
Corey Northcutt: Sure, well they can find our agency site is Northcott Dot com two ts. Also look me up on twitter at Corey Underscore Northcutt c o r e y again northcutt. Yeah.
Ryan Tansom: Cool man. Thank you so much for coming on the show cory. I appreciate it.
Corey Northcutt: Thanks, Ryan.
Ryan Tansom: Thanks for sticking in there. I hope you enjoyed the episode with Corey. It was real and raw and you got to hear some of the inner workings of the stuff that really ended up eating Corey alive and I think if there's a couple main takeaways that I had is the amount of work that it takes to do an operating agreement and to get all of this stuff set up ahead of time is so worth it because it eliminates any ambiguity of how hard decisions are made and you're not going to make good decisions in the heat of a moment because if there's ambiguity, every human being is going to do what they know how to do best and that is survival. They're going to start protecting themselves, their vested interest, and then people immediately started pulling away from each other. So if you can take the time to have an operating agreement and ahead of time as you're forming the business or you're doing it now, while relationships are good, there's a healthy business and you identify how is the company going to be valued. How can people get out, what are the different ways to make decisions? Should there be a challenge or a gridlock between individuals and what they want to do with the business going forward, and then you have roles and responsibilities that are set up accordingly, because you can be an owner and have a different role, but everybody has the equal shares. So clearing all that stuff up. When relationships are healthy and the business is healthy is absolutely a must because if you have something that comes up-- because life is going to pop up, there's going to be death, disability, there's going to be competition. There's going to be random offers. If you know how you're going to handle and how you're going to process those situations because you worked on it ahead of time, the chances are that you're going to have a frictionless and the dramaless world because everybody knows exactly what's going to be expected and how everybody's going to be handling it. So I hope this was able to shed some light onto the challenges that can happen if you don't do some of the hard work ahead of time. If there's one takeaway, go back to your partners, if you've got them, and have the hard conversations about what do you want, how are we going to make decisions and why? So if you enjoyed this episode, give me a rating on itunes. Otherwise, I'll see you next week.