Episode 323: Mergers & Acquisitions as a Growth Strategy with Whitestone's Joseph Sommer

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Founded in 2013 in New York City, Whitestone has graced the Inc. 5000 list for fastest growing private companies in America the last 7 years. Founder and President Joe Sommer has led a superstar sales team and is looking at growth through both organic sales and acquisitions. They recently acquired Merchful, who operates in Canada and Europe, and they acquired San Francisco-founded distributor Design Like Whoa. In 2020, Joe was recognized as Entrepreneur of the Year at SKUCon, and this year honored as ASI's Entrepreneur of the Year. This is his third time to join us on the Skucast. Our first episode was way back in 2018, and it was about how failure drives success. I have to say, it has been a pleasure to watch our friend and CommonSKU customer Joe Sommer and his talented team grow. Today we talk with Joe about why you should consider adopting M&A as a growth strategy, how deal structures need to be arranged per acquisition, but there are common qualifiers, the impact the Commscue platform has had on M&A activity, and we dive into Joe's short-term versus long-term business planning tips. Before our chat with Joe, have you ever said this to yourself? You know, getting new team members up to speed in our industry and our process is is a nightmare, or there just aren't enough hours in the day for me to get my job done, or I wish I could clone myself. Well, if all of that sounds familiar, know this: the combined standard annual growth rate in our industry is 1 to 5%, but common SKU distributors on average grow at a rate of 20%.

Why?

Your disconnected tech is holding you back from growth. If you are a team of 3, 10, or even 20 employees, You're likely relying on apps like Excel, Trello, PowerPoint, or any number of a Frankenstein combination to get your work done. And the more you stack, the slower you move. Well, we are passionate about fixing that. Join us for a free webinar held on Wednesday, September 5th at 2:00 PM ET and hear from our special guest and friend Dominique Volker, who's the VP Sales at Whitestone and 2023 ASI Salesperson of the Year finalist, and learn how they've grown 65% year over year in 2024 with Commons. You. Visit us at commonscue.com or drop in the show notes of this episode, and we'll provide a link to the webinar for you. Today's episode is brought to you courtesy of us at CommonsCue. We are the work-from-anywhere platform that powers your connected workflow, enabling you to process more orders and dramatically grow your sales. To learn more, visit commonscue.com. Now here's our chat with our friend Joe Summer.

Joe Summer, is no stranger to the SkewCast at all. And Joe, welcome back again. But what a great topic we're going to tackle here today. Thanks for coming, my friend.

Thanks for inviting me. Thrilled to be back.

So let's get right into it. M&A is a strategy for distributors. Now, it seems that distributors settle on like an either-or proposition, either choosing organic growth through traditional means or building like building a sales force or recruiting salespeople from within the industry. Or mergers and acquisitions. There's multiple ways to grow, but it seems like organic or merger acquisition, you're pursuing both. Do you think M&A should be a part of a distributor's growth plan, period?

Absolutely. So long as they have a clear understanding of their own personal identity and their own strengths and weaknesses, and they know what type of business would fit into their organization. But absolutely, I think that if a business is growth-minded and wants to level up, building a sales force is one strategy, but also growing through acquisition is definitely another one.

It seems there's a lot of M&A activity with distributors right now.

I don't know if that's just my little silo and my little perspective, but why do you feel it's important now? Do you, do you feel like there's more M&A activity? Obviously with you there is, but Why do you think that might be, if that's the case? And then why do you feel it's important to double down now for you on acquisitions?

I would agree. I do think that the market is hot for M&A right now. I think two reasons come to mind. The first is there's a lot of owners aging out of their business and are looking to sell to the next generation. The second reason is last year for many was a down year. And we just got done with COVID Crazy to think that was 5 years ago, but in 5 short years, there's been a lot of swings in the market. And I think people are asking themselves, is this ownership specifically something that is bringing me happiness and satisfaction in my own life? So that's what I'm seeing. But What was the second question to that?

The two-part—

I kind of have more question around, um, do you, do you think now is a time to double down on acquisitions given that you've said, yeah, it seems like it's fertile soil right now for acquisitions, and you pointed out the fact that a lot of businesses are aging out? It may be something that people need to open their aperture a little bit in terms of their business strategy.

Yeah, I, I think so. You know, for Whitestone, we've been in the market for several years. At every quarterly business review, I tell the staff expect M&A, it's coming. So we're fortunate that two happened to close. Yeah, very similar timelines. But I wouldn't say necessarily we're doubling down, moreover just looking for the right profile of business to work with.

Right.

Okay, so, so with Merchful and Design Like Whoa, two amazing businesses, two very distinct businesses. Let's get into that just a little bit. With the team at Merchful, that seems like a clear POD strategy, like print on-demand expansion move, um, widening some capabilities. You have the international impact at play there. What else factored into that decision?

Well, you nailed it. What factored was they had an ideal customer profile for us. When we look at businesses to acquire, we're looking first at, at ownership. Are they people that we would want to work with, that we would want to hire, that we feel would support us in the long run? The second is we're looking at the staff. Are they experienced? Are they capable? Are they career-oriented in this industry? And then the customers— we want to acquire companies that have customers that fit our ideal customer profile. So with, with both Merchful and Design Like Whoa, all three of those boxes really checked. And then Yeah, we were fortunate through Merchful that it did bring us into the European theater. It was something that we identified as a growth area as part of our 10-year plan. Probably happened a little earlier than we would have liked, but we think that by being able to sell into the European theater, this will not only help our existing enterprise customer relationships, but help us when we are talking to prospective new clients about Whitestone and the enterprise services we're able to offer. As part of our, our larger strategy, yes, building a sales force is a part of that, but the other part of that was growing 7-figure customers. And the only way to grow 7-figure customers is if you're able to service them. And when you start to talk to many companies that are household name brands for all of us, they have international staff and a lot of the distributors are not set up properly or know the many nuances of distributing branded merchandise at a global level. And Merchful has that experience, has those global customers, and will be able to help Whitestone in those efforts.

So you answered my question really. We've all seen this pressure as we've— the world's gotten flatter, there's far more international activity. And so you've seen that with your clients as well. Um, Gemma and her team at Design Like Whoa are absolutely amazing. Merchful is amazing. What a couple of incredible acquisitions. What a fantastic partnership. I mean, was there also an expansion, expansion of service with Gemma and her team that you helped fill, broaden your service levels?

Yeah, I think with, with Gemma and her team, the first thing that comes to mind is Gemma's want and desire to continue to grow and flourish in this business. Gemma is someone that I've built a personal relationship with over the last several years, and she is so incredibly talented that I just saw the strength of her coming in, being motivated, hungry, tenacious, would be an incredible benefit to Whitestone. Yeah. She also has a great leadership team, and so we're able through that acquisition to fill some white space at Whitestone. So I think when, when I look at Design Like Whoa as a whole, yes, the customer profile's there, the people are there, but I think they are helping us level up in many areas with respect to the sales organization and the leadership her team are going to bring in.

Panning back and looking at the industry at large about acquisitions, sometimes it seems like when a distributor sells into a larger network— without naming any names, but there have been large networks that have acquired companies for years in this business— whether this is true in practice or just my perception, they seem to get lost in the acquisition, meaning they sort of lose their identity, become part of the acquirer. Some of that's normal, that's by design, it's a strategic play. But are you positioning Whitestone as like an alternative to the larger networks in the industry? Do you see that as a more intimate play? Like, how do you see yourself factoring in the big picture here?

That's a great question, and thank you for asking that. I want to— I want Whitestone, because we're active in the market and it's part of my 10-year plan to hopefully acquire 7 to 10 companies, to be seen as an alternative to the commission-only sales model that many of the acquirers today offer sellers in the market. And I think that's made finding deals that fit challenging. But I also know that there are a lot of businesses out there that do not operate on a commission-only sales model. And when I think about what differentiates Whitestone as a business in promo, Yes, it's that we do not operate on the tradition— traditional commission sales model, but we also operate a human-first organization that offers 100% healthcare, 20% of healthcare for dependents. We have an incredible benefits package that encourages people to, um, live life to the fullest outside of work. We, I think, are creating a business that others in the industry can benchmark against, but also is one that we are creating by looking outside the industry to see, you know, what are some of the best companies in the world offering, and how can we create a desirable business for anyone in the world to want to come and work. Um, And so I think Whitestone can be an attractive alternative if you are a business owner that is someone that also runs their business with a people-first mindset.

You've touched on that with compensation, people first.

Um, what else do you look for in a partner?

Like, what's a win-win look like for you?

I think a win-win, that's, it's hard to answer because I've seen a lot of deals come to us that may not look like the traditional, that may have something that we wouldn't necessarily expect to be a value-add but is. This could be a business that has a global sourcing office. This could be a business that has one or multiple seven-figure accounts. This could be a business that is also fully remote. This could be a business that has a warehouse. I think that when we look at the market, we understand our weaknesses. We create SWOT analysis all the time.

We—

because we create long-term and short-term plans in the business. We know what our 1, 2, or 3-year targets are in addition to our long-term targets. So we're seeing if there are companies that can help us along our 10-year plan and have strengths that might be our weaknesses. Um, so it's hard to answer specifically.

It's actually a brilliant answer because what you've said is know yourself very well and be pleasantly surprised at the opportunities that could expand your horizon a little bit. Because you could have too strict of a viewpoint and then something comes along and you're like, we didn't even think about this. This is phenomenal.

Absolutely. Yeah. And this aligns with something that we say we want to do XYZ, and this could be a good opportunity now to capitalize.

Yeah. Speaking of, you've closed, closed these deals. No doubt you've evaluated more, um, are, as in profit, sales, differentiated client base.

Are there a few tactical things that you look for?

I mean, obviously it has to be a healthy company. Um, there are so many factors that have to come into play regarding ownership and sales team, but differentiated client base. Like, what are a couple of the hot buttons for you that, that really, really matter?

People.

I think culture is the biggest thing. Anyone that is looking to buy a business, you have to make sure that the people align with your organization, and, uh, that's first and foremost. Um, but then you've got to evaluate the customer base. Are these companies that you would want to work with. There's been deals where the people are great, but the customers are not. And the customers are ones that we wouldn't want to go prospect if we were trying to grow organically.

Right.

So it really goes back to what you said of you have to know yourself and you have to know how you go to market and also, you know, what you're communicating to your staff internally, because that needs to align with your acquisition strategy. You can't say, say one thing and then go bring something else internally. That will ultimately, um, I believe, cause a negative with, you know, who helped get you to where you are today.

Yeah. If I'm a distributor looking to sell, um, can you get into— you've always been really good about sharing details of things that are happening in terms of the actual transactions, but getting into the mechanics of an acquisition and a sell, What does a healthy deal structure look like? I mean, know the variables are immense, and so you probably can't just simplify it, but it's, it's very deal dependent. But are there general principles?

That's a great question. I think that if anyone is interested in selling, the first thing I would say is, um, consult with a broker. One of the deals came by way of Jamie Watson at Certified Marketing. Many people in the industry know her. She was Uh, so easy to work with, and having a broker on the seller side can help you with valuation, can help introduce you to potential suitors. I think that's what Jamie does very well, having a deep network in the industry, is she's going to pair you with people that are right for your business. So she has your interest in mind. I think that's maybe why the Merchful deal worked out so well is she paired us with Merchful and she knew our strengths. She knew what we were looking for. She knew we were looking to go global. She knew we run on common SKU. And so to have someone in your corner is incredibly beneficial. And then she does help with the mechanics. Absolutely. But I think when structuring a deal, the seller has their value. The market has the value of, you know, maybe, maybe what the valuation is or what the appetite is. But, you know, the buying company also has to be okay with the value and how you get there. That can differ with how you structure the deal. And there's so many different ways to structure the deal. But typically, it's from what I've seen, cash upfront and then some form of earnout. And the cash upfront and the years in earnout, that can all vary from either 10 to 50% down or, you know, 2 to 5-year earnout. Really all depends. But the goal is to get through the earnout with the down payment to the valuation that is agreed upon pre-close.

Yeah, that broker is also really helpful for perspective because I know a lot of us that own a business, we have an emotional attachment to that business. And so the broker plays a really critical role in terms of where you think your is at versus what is happening in the market versus what the reality is. And so that can be a really good gut check for a lot of folks.

Absolutely. And I'll say, even if you're not interested in selling right now, it's great to get your business valued. I have Jamie value my business once every 18 months just to see how we're performing. And just so I have a sense of what I need to do in the business to improve it, over time.

Yeah. Oh, I love that. And I've, I've heard that before, that, um, always run a business that is operating as, uh, with an intent to sell, because in that sense you're operating the best business you possibly can. High profits, great team, all of those kinds of things. Um, you touched on Commonsku a little earlier. We've noticed an uptick in acquisitions and mergers with distributors on the Commonsku network, and this largely makes sense because it's a far easier onboarding process when you have like the engine that sort of runs the order management system, and everyone— there's a whole lot less, uh, friction when you're merging with another company. Um, was that part of the equation for you? Is that— has that been important?

It's very important. I say it wouldn't rule out any deal by any means. I think because any distributor not operating on CommonSKU, if they were to come on CommonSKU by way of an acquisition, I do believe it will be a level up for their existing employees and staff, being that Commonsku is the most user-friendly tool in the industry. But it does help in a big way day one with integration. I think it's a, it's a concern people have is how are we going to do what we always do? They always want to know, the employees that you're bringing into the fold, how this is going to affect them and being able to keep the same operating system is critical. So, um, it's been a blessing that these two businesses both run on Commonsku. It certainly is something that I'm, I'm looking for, is more Commonsku businesses in the future to acquire. But it, it certainly wouldn't stop me because I know that it would be a level up to anyone, um, moving on to Commonsku platform as a whole.

Yeah. And as I've talked with many distributors who have participated either as the seller or the buyer in an acquisition. That is the hardest part, is that merging, that, that little window that you have of 90 days to a year and a half of everybody coming on board and sort of cultures coming together. You have so much at work having that, like almost having the same language.

I was just thinking language was the word that was in my head.

Yeah. Yeah.

Yeah.

Same language. That's awesome. Long-term planning. One of the things I've always admired about you is your healthy balance between short-term and long-term strategy. I mean, you've— you literally have a 10-year plan. You've mapped to a certain sales figure. It's not a dream. It's an actual goal with numbers and a plan. What are your significant mile markers for the near future? Do you have these mapped out into 3-year, 10-year? Can you sort of expand that a little bit?

That's a great question. When we created a 5-year plan 6 years ago, I had 1, 2, 3, 4, 5 years all mapped out, and COVID happened, and I realized that projections go to shit when the world flips upside down. So while I have a 10-year plan, creating this 10-year plan, this was the first time that I really felt that acquisitions would be a big part of it. In the 5-year plan, which was our goal to get from $1 million to $10 million, which we exceeded. Acquisitions were not a pillar of that plan the same way.

Yeah.

So it's, it's actually something where I did not put short-term revenue mile markers, rather sought after how can I improve the business operations as a whole, which could be investing in our tech infrastructure, or recalibrating our ideal client profile, or recalibrating our business development strategy, things that I thought would organically help. But knowing that acquisitions were going to come, through which you dramatically increase the organizational value, it's hard to predict what your short-term mile markers are going to be 1, 2, or 3 years out. So it was very much a trust the plan, trust the process, and it was easier to trust this time by way of having executed a 5-year plan in the past. And I thought, let's very much focus on what we can control, which is leveling up growing brick by brick, focusing on the right kinds of customers, focusing on building and developing teams and the best industry sales professionals in the market. And then the numbers would grow. So I guess doing it a little differently this time with number projecting as a whole.

Yeah, I think because we come from— a lot of us come from a sales role into leadership, we are really good at short-term planning. We're good at annual planning. But the 3-year, 5-year, 10-year planning is something we typically struggle with and not really our strong suit. Um, and I'm speaking in an aggregate, and maybe that's not fair, but what advice would you have? I mean, how often are you doing this, like, with your leadership team? Do you sit down and review— do you annually review a 10-year plan, 5-year plan, 3-year plan? How meta do you get with you and the team as you look out at the future?

We look at it— I think going into Denver, our offsite, in September, we're going to talk about it company-wide again. Management team and the sales leadership team know the plan, but knowing that our number is a true BHAG— it is big, it is hairy, it is audacious, it's a little scary— I don't want to continue to put that number out there for fear that others might get intimidated by it. Or I think what I, what I also learned when I shared our 10-year plan, I think that I don't want to say it scared people, but I think there was a sense of holy crap, like, whoa, how— like just questioning, right, what it would be to get there. And so what I am mindful of is I want to make sure that our staff come to work happy and they're thriving in the role, and I don't want big, hairy, audacious goals to jeopardize that health and happiness. Knowing that the sales professionals really only need to take care of their own customers and look after their own books of business, and that management leadership are going to do things that will help improve the business efficiency or the business ability to attract the right customers or do things that will help add to the enterprise value, which is outside the control of the sales professionals or the art team. So, right, I think as we've grown and as we've developed leaders and really created different departments, it's segmenting out each goal in each department to say, how can this department get better? What are, what are the things that we need to look at in this department to level it up? And taking that approach is, I think, the mindset of like, what's that expression, a high tide raises all boats. So kind of trying to look at the whole organization and each element of it without necessarily putting it back on, on the people so much.

Yeah, that's a really, really good point because you have to, as the business leader, think in those long-term strategy. But that can be a little distracting for those who are just trying to do the best they possibly can at taking care of clients and growing clients. And I mean, we know a salesperson's role in this industry is really hard, and it's, it's getting clients growth and things like that. Much respect to your response there because I think that's so true. Let me ask you this about, um, about you, Joe. Um, you are a runner. Um, you've completed a few marathons. You went from— I'm thinking like you just suddenly show up and you're running these marathons. It doesn't always work that way. You're, you're, you typically have a very strong regimen. But how do you feel like you as an individual and your running passion has contributed to how you think about business?

It's been a good outlet, having something to take my mind off work, but also think about work while I am running. I've always struggled with weight, and so running to me is a, it's a great consistent and constant over the last few years to be able to allow me to have an outlet. And I play hockey once a week, but I can't play hockey 5 or 6 nights a week. So being able to go for runs is a great way to free my mind while also having something where I can set goals, work towards them consistently, and push myself in an arena that's not necessarily Whitestone.

Yeah, I love that too, because, you know, it's— you can do it anywhere. It's a very easy get-to-go when you're traveling, whatever. And then you're very goal-oriented, so it makes perfect sense that it's the right, right kind of thing for you. All right, Joe, this is one of our community's favorite questions, and they always love to know what you're reading, what you're listening to lately? What have you watched, listened, read that's really impacted the way you think?

Oh man, I've been so head down that I've really not been—

that's so bad.

I'm so sorry, I'm gonna let this community down. But what I can give is The Offer, a show on Paramount that is a, um, a dramatization of the making of The Godfather from Al Ruddy, the producer's perspective. If you like, if you like The Godfather, uh, this show is for you.

That's awesome. I love that share. Mark Graham is going to love that response. The author on Paramount, uh, thank you, my friend. Thanks for doing that. Hey, Joe, thank you also for showing up and sharing your insight, your wisdom with us here in the community. You have always done that from the very beginning, um, to today, and I personally am so deeply thankful, and I know our team is too. So thank you, my friend, and to your entire team. We're an amazing team. We're excited to be a part of your story.

Thank you for having me, Bobby.

Thanks so much for tuning in to this episode of SkuCast. Be sure to keep up with our latest content by subscribing to SkuCast on iTunes or to our blog at community.com.

Commskew.com.

Until next time, friends, thanks so much for listening.