Two trends have come to define the promotional products industry in the years since the Great Recession. The first is the continued increase in overall industry sales—PPAI’s 2017 Sales Volume Study shows that between 2009 and 2017, distributor sales have grown from $15.6 million to $23.3 million, a 49 percent increase. The second trend, and one that is in many ways linked to the first, is the prevalence of mergers and acquisitions. In the first nine months of this year alone, more than 20 company acquisitions have been inked.
Consolidation is not a new concept in the business world and it has been happening regularly among the industry’s diverse market for years. Yet it would be misleading to say that the current rash of such agreements is business as usual. “The winds of change are blowing,” says Phil Koosed, president of Los Angeles-based distributor BAMKO, which acquired Public Identity and Tangerine Promotions in 2017. “Business models that worked five years ago will fail five years from now. Companies that evolve with the times will be bigger and better for it.”
To understand why acquisitions are becoming the norm is to understand the changes that have taken place in the promotional products industry and in the economy at large. To do that, you must first learn who is making these decisions, what they want and how this will affect the future of the market. Understanding the what, the why and the how of the issue can also help suppliers and distributors answer the most important question: Whether making or being part of an acquisition is the right decision for them.
Why Mergers And
Acquisitions Happen
There are multiple complex reasons why a company would decide to purchase a competitor, including customer demographics, regional access, increased efficiency and superior buying power. However, in the end, most of those explanations can be reduced to one word: money.
“The increased sophistication and the increased demands of businesses have increased the cost to suppliers and distributors in our industry,” says Marc Simon, president of HALO Branded Solutions in Sterling, Illinois, who has overseen his company’s acquisition of multiple distributors including Sunrise Identity, Michael C. Fina Recognition, Catalyst Marketing, American Pacific Promotions and Newton Manufacturing. Acquisitions fill needs for both companies. “The need for product safety, for social compliance, for connectivity, for network security, for PCI compliance, for web stores, for creativity, for many other things mandate that suppliers and distributors develop meaningful scale quickly or perish,” he adds.
It’s no secret that the cost of doing business has increased steadily over the years, due in part to external pressures like government regulation and material costs, as well as internal forces like the drive toward product safety and compliance. Meeting these demands while remaining profitable requires ever-increasing income, which can be a challenge in dense markets where most potential clients already have preferred vendors. That leaves few options for expanding, and only one with large returns.
“For any of the big suppliers, the easiest way to grow now is to acquire another supplier,” said Pierre Martichoux, founder and president of Gilroy, California-based supplier Chameleon Like, which acquired The Platform Gallery Group in August. Not only can buying a new book of business be the most straightforward option, it also can have the biggest perceived impact. By buying another company and adding their sales to your own, a parent organization can show massive year-over-year growth to investors and lenders.
Aside from the business and financial considerations, suppliers and distributors may have personal motivations for selling. “If you’re a business owner who was a salesperson and then opened a company, you may think you could make more money if you didn’t have the overhead,” says Larry Cohen, CAS, president of New York-based Axis Promotions, which purchased Campus Stop this year. “The idea of selling out and focusing on what you do well and what made you a success while letting someone else worry about the back end, can look really appealing.”
What Makes Companies Attractive For Acquisition
Whether you want less responsibility, more stability or are looking to cash in your chips, selling your promotional products business may be the right option for you. Before that can happen, it is important to position your company optimally for the sale, and that requires knowing what buyers want to see in their potential investments.
“When we are evaluating a company for acquisition, we look at several factors, all of which need to be present for us to go forward,” Simon says. “We look at the strength of the management team and the culture they have created. We look at the industries in which their customers are engaged and the company’s ability to maintain and grow revenue. We look at the cost structure. We consider whether we can add value to the business and to its customers.”
While all buyers will place importance on different aspects, the book of business, three-year sales and company culture are all of primary importance when positioning your company for purchase. Beyond that, the needs of any acquirer can be more specific, but they often fall into a few specific categories.
Timing is also a major factor in any acquisition. It can take years to develop the necessary trust between both parties before everyone feels comfortable closing a deal, and in that time, it’s vital that the seller maintains their performance. “We would suggest owners spend a few years positioning their company for sale,” says Jon Levine, president of The Image Group in Holland, Ohio. “Many wait until their sales have trended down before deciding to sell. We, along with most acquirers, are looking for upside.”
To learn how to prepare a company for sale, it’s best to ask someone who has been in that situation. Mitch Mounger, president of Sunrise Identity in Bellevue, Washington, was intimately involved in his company’s decision to sell to HALO Branded Solutions and says one of the most important factors is the client. “Maintain an intense focus on client satisfaction,” he says. “Satisfied clients create value.”
Happy clients start with happy sales reps. Any potential merger needs to focus on the staff and culture as much as on the bottom line. “If you’re buying a business that is driven by a strong sales team, it’s going to be really important that those salespeople stick around. They ultimately have the relationships,” Cohen says. When planning to sell a company, it’s important to talk to the staff about the new culture and their role in the business. A successful transition ensures that both organizations can continue doing what they do best, especially in terms of personnel. “You can buy a business but find out what you’re buying is fleeting if those people decide to leave or are unhappy,” Cohen adds.
What Acquisitions
Mean For The Future
When it comes to the industry’s future, there are as many opinions as there are suppliers and distributors. There has been fear that consolidation is a threat to the industry, creating a handful of giant businesses that could stamp out smaller competition. While more change is inevitable, the consensus is that the promotional products world is too diverse—and too creative—to ever become monolithic like some of today’s modern tech giants.
Both Simon and Koosed expect the biggest fallout to be among mid-sized businesses earning between $10 and $20 million. Companies in this range aren’t pursuing the same clients as mom-and-pop outfits, but they also may not have the resources to compete with the $100 million-plus titans. While that scenario may be scary to some, there is a silver lining: companies in this range are the most attractive targets for acquisition, giving them great value.
Even with increased consolidation, the industry itself is inherently resistant to any one major player. The fragmentation of the market, from suppliers and distributors to clients, can only be met with a large and diverse system. As Cohen puts it, “There are 20,000 distributors out there. It’s not going to become an industry of 100 companies with no room for small business.”
Of course, the outlook for the industry is great when you’re the one buying all the competition, but it goes both ways. As someone who recently sold his company, Mounger couldn’t be more optimistic about the future. “Better, stronger competition will be the end result,” he says. “There will always be room for what makes this industry attractive, and that is the entrepreneurial spirit that attracted so many of us to the industry to begin with.”
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The Acquisition Inquisition: Three Questions To Consider Before Buying Or Selling
David Miller, president of Chocolate Inn/Taylor & Grant/Lanco in Ronkonkoma, New York, and Lance Stier, principal of NC Chocolate (parent company of Chocolate Inn/Taylor & Grant/ Lanco), have completed several acquisitions and mergers in the past several years, and have learned a thing or two about what makes a good deal. “We seek businesses which are synergistic with our existing business and either build scale within a category or provide a platform in a new category,” they say.
Before making any acquisition, Miller and Stier ask themselves three questions. Whether you’re looking to sell your business or buy another one, review the following to see if the deal makes sense to you.
1. Does the acquisition address a customer need? A merger may look great on paper, but if it doesn’t translate into more sales, it’s a sunk cost. “We interview our customers prior to making a deal about the category,” they say.
2. Will the purchase strengthen the company’s products or services? A signage supplier may not know the first thing about selling a polo, and a superstar distributor can’t land a single sale if his or her new customers don’t speak the same language. Before making any moves, be sure the deal makes sense for your business.
3. Can the business be consolidated
or streamlined and made profitable?
Businesses that aren’t well run can be a better option for acquisition. Technology and economies of scale can turn a mid-tier purchase into a powerhouse—if they have the customers to back it up.
After you answer all those questions, Miller and Stier recommend considering one more: Do you want to work with the other company in the equation? “We like partnering with solid management teams who, like us, share a passion for building businesses and common values,” they say.
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Private Equity And Promotional Products
If mergers and acquisitions are a hot-button issue in the industry, then the influx of outside money from private equity firms is the nuclear football. Since the recession, private equity groups have sought out fragmented markets as their next source of steady income, and the promotional products world has fallen into their sights.
“There are smart operators who realize that they can make a lot of money by vacuuming up as much revenue as possible, stripping out spare parts, cobbling it all together for institutional buyers and flipping it quickly for a big profit,” Koosed says. For these firms, suppliers and distributors are not long-term investments, but more like real estate to be flipped: They can streamline the operation, add a fresh coat of paint and sell it for a profit within five years. “The downside of that approach comes in the integration—there’s a significant diminishment in customer and employee experience,” Koosed adds.
Not all private equity groups are interested in short-term gains, and some major industry players are already affiliated with equity groups, including HALO Branded Solutions, which was acquired by TPG Growth in May. For some, the benefits of aligning with an equity group—financing, business consulting and a larger presence—may be just the answer. But even if an equity group can give you everything you want, Koosed, Cohen and Martichoux advise thinking about what that deal could mean for the future of your business.
“The peril that I see in the private equity approach is that private equity firms generally don’t invest enough in the customer value proposition and employee experience,” Koosed says. “They focus on growing the number and amount of transactions. With this transactional approach they’re positioning themselves to compete against Amazon and Walmart. I wouldn’t bet against Amazon in that fight.”
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Kyle A. Richardson is a writer and editor living in Philadelphia and the former editor-in-chief of Promo Marketing magazine. Reach him at www.karichardson.com.
