This is Stephan’s podcast appearance about Cut Your Earnout on the Built to Sell Radio.

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My next guest is Stephan Spencer, who sold Netconcepts to Covario in 2010. I think the story is fantastic, and there are lots of lessons embedded throughout. There's one little reference I wanted to make sure you listen for, and it's where Stephan talks about having multiple bidders for your company and the importance of that but also the importance of being relatively subtle in letting buyer number one know that there's a buyer number two interested in the business. I think this is a really, really insightful point.

As much as we all want to go to market and create a buying frenzy for our business, the reality is unless you are the next Google or the next famous company, there are going to be just a few bidders for your company. Some buyers will get turned off if you overplay your hand or if you suggest that there are many bidders who are all chomping the bit to buy your business. Some buyers will turn to you and say, well, you know what, then we're out. We're not going to participate in a beauty contest, we're not gonna participate in an auction, we're out. And you will have overplayed your hand. 

So, while it's a very subtle conversation that you've gotta have with buyers, and again, your intermediary is likely to have this conversation, they want to be aware that there are other parties that are interested in the business without being forced into making a decision or without having the sense that you're overplaying your hand. It's a subtle, subtle difference that I think Stephan does a great job of articulating how you've got to play that dance without further ado, Stephan Spencer. Stephan, welcome to Built to Sell Radio.

Thanks for having me.

Yeah, so you started this business called Netconcepts in 1995. Tell us a little bit about what you did.

Right, so it's an interesting story. I was actually a graduate student in biochemistry studying for a PhD. And I met some of the guys from Netscape at a conference. So I decided I got to get on this bandwagon. So, I dropped out of my PhD program to start a company, which was Netconcepts. Not having any experience with business courses or even computing courses really, I was studying for, you know, down this track to become a postdoc and then a professor and so forth. So, I started Netconcepts as an interactive agency, and then, over time, I morphed it into an SEO firm. So, search engine optimization became an expert in how Google works.

Fantastic. So for folks who are maybe new to SEO or SEM, your company would help a business improve their rankings, both naturally and paid, so that when somebody types in, you know, Plumber, Denver, you know, their company would come up. That's basically what you morphed into, is that right?

Yeah, that's right. But it was primarily more on the organic side, the earned media side, instead of managing people's ad campaigns and Google AdWords. I mean, we did a little bit of that, but it was mostly on the SEO side.

Got it. And how did you charge for your services?

Right, well, that's another interesting story because we were charging on a monthly retainer basis primarily for consulting services. We do one-off SEO audits as well for a set fee. But then I realized that while on the paid search side like Google was charging per click for Google AdWords for the pay-per-click revenue, what couldn't we figure out a way to do on the SEO side?

And I had invented a technology platform in 2003 that allowed us to do that very thing. And it was less per click to use our technology that I'd invented versus paying Google for AdWords. Yeah, so it was just basically a no-brainer, let's buy as much traffic as we can from that concepts using their Gravity Stream platform. And then whatever is left, we'll spend on our pay-per-click budget with AdWords and so forth.

So Gravity Stream, help me understand, it was a product that you were essentially reselling?

Yeah, it was essentially, there's this term in the industry called software as a service, so we were selling the software as a service, and it was running on our servers. The beauty of it was we were basically fixing all the inherent problems with our client's website. We had companies like Nordstrom and Zappos using this technology. It was just a runaround of a workaround for making the hardcore kind of invasive changes to the client's website and their underlying e-commerce platform or CMS (Content Management System). 

So essentially, it was like, well, let's have, rather than all the major invasive surgery that would be required if we wrote up an audit and went through this consulting arrangement and then you spent many, many months and millions of dollars fixing your website, let's just fix it for you through this technology, and you charge per click on a performance basis. And so it was a no-brainer.

The thing was that clients didn't know that such a thing existed. So, we still hung out our shingle as an SEO consulting firm. We'd get clients coming in, and then we'd look for opportunities where Gravity Stream could solve their problems without the major invasive surgery that would normally be required. And they loved it. And we had actually the majority of our revenue was driven through that technology platform through that software as a service.

So, by the end, the majority of your revenue was coming from Gravity Stream, the software, as opposed to the consulting side?

Correct. Even though we hung out our shingle as an SEO consulting firm.

Interesting. And was that intentional that you found the custom consulting, positioning yourself that way was sort of a great way to get in the door and then on the back end sell Gravity Stream?

It was a perfect way. Yeah. And some of it was luck. We didn't figure this all out at the beginning. I mean, I was working on a client engagement as a consultant. I flew into or drove into Kohl's headquarters, Kohl's the department store chain. And there was a problem I was trying to solve to show that we weren't gonna ruin their site with SEO, that it wasn't gonna be just full of keywords everywhere. And I had no access to their servers. So, I'm like, how can I figure out a way to show them what we could do in terms of SEO without any access to their site? 

So I invented this proxy server approach to fix up their site. That was just for demonstration purposes, and they loved it, and we did great consulting work for them. But then I had another client a few months later, Northern Tool, that was running up against a deadline, a holiday kind of server, a code freeze deadline, they call it, where they're not going to make any changes during the holiday season. It was August, and the deadline was September. And we really need to fix the URLs of our site. 

This probably sounds pretty geeky for some of your listeners, but we were just running up against a wall, and their servers weren't cooperating. So I'm like, what if I used that same technology? That proxy technology that I was using demonstrated to Kohl's what we were going to do. What if it was in a production kind of situation and running all of the optimizations for Google on the Northern Tool website? And Northern Tool loved it, and they were like, let's do it. And that was the workaround. Then, the very first Gravity Stream client.

Love it, love it. I just did an interview the other day for a podcast, and one of the guys says, you know, what's your best advice for young entrepreneurs or whatever? And I said, just go sell something. Go get into business. Don't worry about humming and hawing about your business plan. Go sell something because that's when, you know, you're gonna find out what your customers really want, and you're gonna start to actually build a business. If you just sit in the background and doing your business plan again and again and again, you're never gonna realize what the market wants. In your case, it was selling the consulting services that helped you identify Gravity Stream as a product. Give us a sense of how the business scaled. So you started in 95. By the time you were building to sell and moving in that direction, what was the revenue up to, the number of employees, that kind of stuff?

Right. So, yeah, it took a bit of a, there's a bit of a story arc here because, so we had maybe in the late 90s around, I don't know, 12 staff. But then I got this idea in my head, "I wanna live in New Zealand," which I had never been to. And none of my staff knew I had this desire. I was talking to my family about it, and we're like, okay, yeah, we can get on board with that, even though they hadn't visited either.

Whose they? Is it your kid's wife? What's the situation?

Yeah, three daughters, stepdaughter, and my wife at the time. We all decided, "Let's do this." I applied for permanent residency and got in. We moved to New Zealand in late 1999. We had clients—all of our clients were US-based—and they didn't know this was coming. One of our bigger brand clients was Bird's Eye. And I thought, "Oh, I maybe have a 50-50 shot of this company still surviving the founder moving half a world away." But I'm willing to take the risk, and entrepreneurs are risk takers, and I wanted the lifestyle of living in paradise in New Zealand. So we did it. 

I started an office in New Zealand. We kept a small office. We scaled down to just a few staff in the Madison, Wisconsin office. Then, I built up an office on the North Shore of Auckland, New Zealand. And that actually not only did we maintain our clients in the US, but we were able to grow them pretty significantly because I was able, with the favorable exchange rate, to hire top, top talent in New Zealand, where it was hard to compete in the US, and especially in Madison, Wisconsin, and the siren song of, "oh, go to the Bay Area and make a fortune over there." Programmers and designers, and so forth.

Dollar for dollar, Stephan. What would a programmer cost you in Madison? What would the same programmer have cost you in Auckland?

Well, at the time, I mean, the exchange rates changed quite a lot, but it was probably two for one.

Wow. So you've got this great exchange rate, you're building the business in Auckland, and then what happened next? Did you come back to the United States? Maybe take us to the next chapter? What triggered that?

Right, so in 2007. My family and I decided, “Let's move back to the States.” I wanted to sell the business, and it would be more effective. By the time we'd grown pretty significantly, we were well over $5 million a year in revenue. Gravity Stream had really grown and was driving. It was really the engine for growth for our business. I wanted to exit. Within the next couple of years, which we did. We exited in early 2010, but I figured it would be a lot more efficient and effective if I were stateside during this selling process.

What was the triggering event, Stephan, that made you think, "I want to sell"?

I was just kind of ready to do something different. It had been well over a decade of running this business. I had a great lifestyle. In fact, halfway into that time in New Zealand, it was almost eight years I was there. Halfway into it, we decided to move away from Auckland to the South Island of New Zealand to Christchurch, where I didn't have any staff. All my staff was in the Auckland office at the time, and we had maybe 25 staff members, maybe 30. And yeah, I decided I'm going to let my general manager kind of just run with things. We also have brought on a CEO in the New Zealand office on an equity, sweat equity sort of basis. And yeah, I just kind of not checked out, but I drew away a bit from the day-to-day operations of the business. I only flew into Auckland to check on things and to participate in strategy meetings and things like that.

A lot of people are listening to this, though, Stephan, and going, wow, that sounds like the perfect life. If you'd set the business up so well to run without you, why sell?

Like I said, I just was interested in doing something different. Now, it was not. I didn't have a fire under my butt to sell. I was ready to do something different, but if I didn't get the right price, I was not going to sell. So, plus, we just missed the US. I had made many, many trips over those seven and a half years. Average, maybe, seven or eight trips a year for a week and a half at a time. It was kind of exhausting. So that played into the equation, too.

I was tired of all that Trans-Pacific travel. So I thought, let's move back to the States and see what happens. We're not under the gun to sell for any particular reason. But halfway into running the business, I was like, "Yeah, I'm really tired of this. I'm kind of burned out. I need a break." I took a six-month sabbatical and did hardly check in. I did give one or two speaking gigs during that whole time. But I was I was off the grid for that whole time of six months. And that was great. I rejuvenated and came back excited and reinvigorated to work in the business again.

If you're listening to this, Stephan, I'll just interject briefly. If you're listening to this, one of the eight things that drive the value of your company is going to be what we call hub and spoke, which Stephan is describing as the ability for you to step away from the company and the business to continue to thrive without you start with two days, see how it works, then go to a week. In Stephan's case, you were six months away from the business. So clearly, this was an attractive asset to the buyer.

Right, and it wasn't always that way. So back in the late 90s, when I was looking at selling, I mean, looking at moving to New Zealand, I also looked at selling then. My name and my personal name are Stephan Spencer, and my company name is kind of two intermingled. And if I didn't go with the business, nobody was going to buy it. So I found that out through just kind of quietly shopping. My business around in the late 90s before we moved to New Zealand, and I was like, yeah, that's not going to work.

So, what did you do, Stephan, practically speaking, to make your business less dependent on you personally? I think what I would love to hear right now is some very specific tactics, not generalities, 30,000 foot, but very specific things that you did to make your business less dependent on you in those seven years.

Right. So, I mean, the biggest thing was that technology platform because that was just an ATM machine. It just was printing money for us. So that was a huge part of the equation. I also hired a CEO. So I had a general manager that I hired within weeks of landing in New Zealand in 1999, early 2000. So that helped to have a manager, not just an office manager kind of person, which I had left in charge of the Madison office, and she grew to become what we called her managing director so that she'd be able to get meetings with key prospects and so forth. But bringing on that general manager who then did all the hiring, did all the performance reviews and all that stuff, so I didn't have to do any of that anymore, not only freed me up like mentally and brought more joy back into my life, my business life but also made it more scalable and more sellable without me having to go with it. 

Now, I was still the thought leader.  So, that's an issue where you have to develop other thought leaders within the company. So, I encouraged key staff, various executives, and top consultants within the company to speak and write articles for multi-channel merchants, search engine land and so forth. I introduced them to the editors, and a lot of folks would be like, what are you doing? You're basically giving them a platform to charge whatever they want and hold you hostage and say, double my income, my salary now because I'm this famous SEO consultant now, or they'd leave and go to work on their own. But you know what, if you hold too tightly to your business and you don't actively develop your staff kind of work on growing their CVs or resumes at the same time as you're building your revenue base, you're stymieing your growth and making it harder to sell.

So, the Gravity Stream product helped hire a CEO. Helped and encouraging your staff to have their own profile sort of helped make this business less dependent on you.

Yeah, and we added more governance, so I created a board of directors, which ultimately led to kind of my disengagement with the business because I became a minority. I became a minority shareholder through my divorce, which I can get to in a minute, and I was only one of five board members at the time that happened. So, I lost control of my business, which was a painful lesson.

Take us through that, Stephan.

Yeah, okay. We moved back to the States, to Madison, Wisconsin, in 2007, and then in 2008, my wife at the time said, "This isn't working. I'm filing for divorce." So I was not expecting that. That was a surprise to me. It's a huge blessing, in retrospect. I'm with my soulmate now, and we're going to get married this year. At the time, it really broadsided me. And so, by having the business structured the way it was, there were five board members. 

My wife at the time had a seat, I had a seat, and we had my CEO in a seat and a couple of advisors that just were really great industry folks on the board as well. That sounded really good at the time when I had no idea that my marriage was in trouble. But then to have the situation where suddenly I'm a minority shareholder in my own business, and I'm also one of five board members, I'm like, "Wow. Okay, this is not working for me."

Stephan, how did you become a minority shareholder? So I get the fact that you would have had half the shares between you and your wife. Is that how that is structured?

So she had half of the shares between the two of us, and I had the other half, and this was already on paper. It wasn't through the divorce proceedings that our shares got split up. So, she already had half of our total shareholding. I had also given key staff like the CEO had a chunk of the business, and our chief operations officer had a bit, and a few other key people, VP of sales and marketing, had some as well. And so it all adds up to essentially, at the end of the day, I had not enough to really drive me to wanna stay with the business and really grow it. 

I'm like, yeah, if we didn't find a buyer, I probably would have just moved on and done something different and left the folks to run Netconcepts. So it was great that we did have several potential buyers at the time kind of competing with each other. That's another key thing: don't just have one potential buyer, but be very subtle about how you let the other buyer know that there's another buyer courting you. So that really worked in our favor and then I was able to negotiate favorable terms in terms of my burnout. I didn't have to stick around for several years. I was done in eight months at Cavario, and then I went off and did my own thing and built up what I'm doing now.

Wow. So many questions. So you've got this board, you, your wife, your CEO, your two advisors. Did you all agree to take the business to market that it was time to sell it in light of the divorce?

Yep. There was interest in selling even before the divorce, and not that it was like a big fire under our butts like I said, but there was interest in doing that. But then when the divorce happened, and my ex-wife and I were both like, yeah, we definitely want to sell. We're ready. And it was pretty easy to get the other board members on board with that because if the primary thought leader in the business and founder is ready to move on, it's probably time for the whole company to get sold rather than just have that founder go off and do something different and potentially even create a competitor.

So, take us through the sales process. Did you hire an intermediary to shop the deal? What was the next step you took?

Yeah, we hired an interim CEO because the CEO that I had was based in New Zealand. So, that was logistically difficult to manage. And we figured that we needed somebody who had experience dealing with kind of the VC world and the potential buyers and so forth. So we hired an interim CEO who did a great job, and he got us most of the way there and created all the kinds of documentation that would be required and so forth. And then we are at the kind of 90% of the way. Mark had moved on because he was very expensive, too. We had to kind of do it ourselves at the very end, but he had gotten a lot of the ducks in a row for us and gotten the conversations going with these two potential suitors.

And when you say gotten most of the way there, did you then hire an intermediary or did you negotiate with both of those suitors directly?

Yeah, we did it directly, which probably, in retrospect, was not the smartest move. And we didn't get the best deal that we could have. But, you know, as I said, it was really expensive to have this interim CEO, and cashflow just didn't support continuing at that high price. So, yeah.

Ballpark. I mean, I don't need to know what you pay your interim CEO. But ballpark, what does an interim CEO cost? If entrepreneurs are listening to this saying, you know, what would it cost me to hire an interim CEO? I mean, it must be pretty significant money.

Yeah. It could be, you know, half a million dollars a year, plus or minus.

Yeah. And so you had these two potential suitors. You mentioned it was important for you to be subtle about letting them know you were also negotiating with a third party. May walk us through that comment a little bit.

Well, I think it's kind of crass if you just say, "Well, I've got this other company, and they're making this offer, whatever. I'm not a professional negotiator. So, take all this with a grain of salt." I took a Keras seminar on negotiating a long time ago, but that's kind of the level of experience I have in negotiating. So, I'm not an expert on this pitting the two suitors against each other in an overly aggressive way. So we were subtle about it, and I think it worked very much to our advantage or to our inner favor because Covario, the company that ended up acquiring Netconcepts, did introduce some more favorable terms into the LOI, into the letter of intent and allowed me to negotiate certain things even after the LOI, like the earn-out time period and so forth. I don't think they thought that I would just leave as soon as the earn-out was finished. I'm pretty sure that I surprised their CEO when I said, I'm out of here. But it was something that I just would not have negotiated. I would not have said yes to the deal. I would have scuttled the deal if I had to do like a two-year earn out or something. I'm just not interested in having a job and those golden handcuffs for even a year. You know, six to eight months was my max, and I was able to get it.

And give us tips because certainly in a professional services environment, now granted you had Gravity Stream and so there was the product overlay, but certainly in a professional services environment, you know, we would be used to seeing earn-outs length of two or three years. You got it to eight months. What were your tactics there to get it down to eight months?

Well, I was just really insistent that I'm not signing unless I, you know, I don't want any earn-out. I don't want any golden handcuffs. I want to stay because I'm just excited and delighted to stay with this company, not because I'm contractually kind of forced to. So, that was just my line in the sand.

Yeah. As part of the deal, I understand as part of the divorce, you had to disclose the buying price Covario paid. Do you mind sharing what they actually ended up paying to buy Netconcepts?

I think that's confidential and I could give you kind of a general idea of what went into the deal.

Sure, that'd be great. As far as, yeah, that'd be great.

Cause there was some cash and there was some stock. This was another lesson, which is to have the two business entities compatible with each other. So the company that is acquiring you, if they are a different type of entity, in this case, it was.

To mean a legal structure?

A legal structure, right. So they were a corporation, and we were an LLC. And oh, what a mess. So, essentially, we got taxed to an extreme because of that discrepancy between the two business types. If we were both corporations or we were both LLCs, it would have been way better. So, I paid a lot of tax, a lot of tax. So, I had to pay significantly for the stock that I got from the government, right? So, and then for the cash that I got too.

So, I got some cash for the stock. I have some stock for the stock; refer to the shares of Netconcepts LLC. And I got some. Also, Covario acquired itself in 2014. And I got some cash again then because Covario was acquired by Dentsu Aegis, which is a big multi-billion dollar ad agency conglomerate. And so I had stock in Cavario that I was able to get cash out of at that point.

Fantastic. And that's one of the things Bill does: sell radio listeners. If you are accepting a deal where you're taking stock in the acquiring company, keep in mind that they, too, may be acquired. And what are the provisions? Your lawyer you're going to want to have your lawyer provision or write up some details as to what happens in the scenario where you're an acquirer, in turn, gets acquired by an even larger company because that can accelerate payments to you, but it needs to be papered properly by a lawyer. It sounds like you have some good representation in your case, Stephan.

Yeah, yeah, great representation in terms of lawyers and accountants. Yeah, we didn't just use our normal accounting firm to handle the transaction. We stepped up our game to really get high-end firms to help us with the whole transaction.

Fantastic. Talk a little bit about the proportion of the deal that was on the earn-out. So, in an agency environment, believe it or not, I've heard numbers as high as 70% of the total compensation given to the owners contingent on them hitting future goals in an earn-out. I'm sure it wasn't that high in your case, but can you ballpark for us what proportion of your total sort of take from the deal would have been, if you will, at risk in that eight-month earn-out?

Yeah, well, it was less than half. Let's say that. Like I said, I'm probably still contractually obligated to not disclose specific terms of the deal.

Absolutely.

Yeah, so, yeah, let's just say it was less than half, but it was significant enough that I actually did wanna stick around for that.  Actually, technically, I think it was a six-month earn-out. But then I wanted to wait till the last check cleared, and everything was, you know, there were no questions about did we hit the retention threshold of retaining these clients and the revenue numbers from these clients and so forth. So, as soon as that all was clear that we had hit our numbers, gone. I was out of there.

You're not alone, my friend. We hear that a lot. The year-on-out period is not fun, and then, obviously, entrepreneurs are meant to be entrepreneurs and not employees, so you, in your case, went off and did something else. What are you up to now? Tell us a little bit about what you're doing now.

Great, so I am doing consulting, but instead of building up another agency again, I have a small team, and I'm just doing solo consulting for the most part, where I'm advising big-name clients and also some smaller companies too, like even startups and nonprofits and so forth on SEO, how to get to the top of Google. So I've worked with, since the post-acquisition, I've worked with, for example, Chanel, Bed Bath & Beyond, Best Buy Canada, Sony Store, Zappos, CNBC, and Bloomberg Business Week.

Lots of big brands. Yeah. And so, where do people get in touch with you, Stephan?

Yeah, so my website is StephanSpencer.com. So, go there and check me out. My email is Stephan@stephanspencer.com. If your listeners would like a copy of one of my books, I got permission from my publisher. My publisher is O'Reilly, and they're an awesome publisher. I have three books with them. Your listeners can get a digital copy of one of those three books for free. The three books are The Art of SEO. Some co-author on that. That's a thousand pages. That's a heavy read. My friend Amy Africa says it's better than Ambien. I'm not sure if that's a compliment, but I'll take it as one. Social Ecommerce. That's all about taking social media and leveraging it to drive online sales, not just for making friends on the internet. So it's got a real business purpose if you do it right. So, that's Social Ecommerce and that's only a few hundred pages. That's a lot easier to read. And then the third one is Google Power Search. That's under a hundred pages. So that's a no-brainer and that's all about how to be a power user of Google and find anything. Confidential business plans and marketing plans of competitors are even forced to research reports that normally cost thousands of dollars. It's amazing what you can find with Google if you know the right kinds of searches to use, and we all use Google. So that's a no-brainer for everybody. That one's Google Power Search.

So how do our listeners get a whole? You mentioned we can get a free download of one of these books. How do they do that?

So email my assistant. I can't put the URL out there because then it's going to be out and, like, on the show notes and whatever. But if your listeners email. My assistant and her email is admin@stephanspenser.com. You can also put that email in the show notes. Just say that I want the free book, and you don't even have to decide yet which book. She'll send you a link to then pick which book you want. It's on the O'Reilly site, and you get it for free. So it's like for The Art of SEO, that's a great bargain because it's a $50 book retail. Social E-commerce is a $40 book.

admin@stefanspenser.com. Stephen, thank you so much for joining us.

Yeah, you bet. It's great having you. My great being here.

Thanks for listening to Built to Sell Radio with John Worrello. For complete show notes with links to additional resources, visit builttosell.com slash blog. John is the founder of the Value Builder System.

To find out how to improve the value of your business by 71%, visit Value John is also the author of Built to Sell, creating a business that can thrive without you and the automatic customer, creating a subscription business in any industry. Connect with John at Facebook.com/BuilttoSell or on Twitter at John Warrillow, W-A-R-R-I-L-L-O-W. Thanks for listening.