Episode 118 – How Canada’s Fastest Growing eCommerce Agency Scaled Quickly Through Acquisitions – Member Case by Colton Hathaway

Previous sessions often revolve on how to exit a professional service firm. What if we flip the script and discuss how to scale by purchasing professional service firms? On this episode, Colton Hathaway, VP of Technology at Northern Commerce, shares how their firm was created through a merger, and how they have grown by acquiring other firms.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv Podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those who are not familiar with us, Collective 54 is the first mastermind community focused entirely on the needs of the boutique professional services industry. My name is Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to talk about growing your firm inorganically. In other words, doing some acquisitions, buying some firms. And the reason why we’re doing this today is because the world has changed. As we were recording this at the beginning of 2023. And, you know, interest rates are up. Maybe there’s a recession upon us. And what that means is that multiples have come down in the professional services space, more so in some sectors than others. And it may be an opportunity to to buy some firms. Many of our members don’t know how to do that. They’ve never done it before. And our objective of today’s call to put that issue on the table, at least get it in their consideration set. And we’ve got a great role model with us, someone who’s done quite a bit of this. His name is Colton Hathaway. Colton is a collective 54 member, and he’s going to walk us through kind of his approach and share some of his story. So, Colton, it’s good to see you. Please introduce yourself to the audience. 

Colton Hathaway [00:01:42] Thanks so much for having me, Greg. So I’m Colton, VP of Technology at Northern Commerce. We are a platform agnostic ACI, meaning that we can introduce solutions that make sense for the business, that can be retailers, B2B manufacturing, being a B2C firms. There really is a wide breadth of solutions that we’re able to provide into the market. And, and yeah, excited to talk about today’s topic. 

Greg Alexander [00:02:06] Okay. And VP of Technology, what does that mean in your firm? Is your firm a co-founders founder, CEO? How does all that work? 

Colton Hathaway [00:02:17] Sure. Yeah. I mean, my role is kind of unique given that we are a technology firm. I do a lot of different things, whether that is in sales to key accounts, leading partnership strategy with different platforms. We work with nurturing the different teams that that engage with our client base through delivery solutions, things like that. I kind of see myself as a bit of a servant leader, support to different parts of the business where I can create value. 

Greg Alexander [00:02:42] Okay, sounds great. All right. So from what I understand, part of the growth story that your firm is, is that you’ve grown through acquisitions. So maybe at 30,000 feet. Kind of walk us through your strategy there. How many deals have you done? Why have you decided to do it that way? Etc., etc.? 

Colton Hathaway [00:03:02] Sure. So I’ll take you way, way back to kind of, I guess, the founding of Northern. So Northern originally was the product of two different solution providers. There was a marketing firm and then there was a technology e-commerce firm. The the merger of those two firms created Northern backing in 2015. Those two firms independently were obviously existing before that. And so the merger and then acquisition really was kind of like the foundation of Northern that practice. Fast forward to right at the start of the pandemic, I believe it’s 2020. We ended up acquiring another firm based in the same city. So similar story, similar size. And really at that point, it doubled the capacity to the size of our team. So we ended up acquiring another firm that was essentially the same size as us. And a lot of I hate using this word, but a lot of synergies between the two teams. It made a lot of sense at the time and and that’s been part of our strategy ever since. Right. So yeah, I think it’s it’s not it’s the easiest thing to do in doubling your size through an acquisition. It worked out really well for us and a lot of the same talent that came over as part of that acquisition are still here today and really excellent team we put together. 

Greg Alexander [00:04:12] Okay, fantastic. So I’ve done some deals myself and the way that I always look at it and maybe I’ll throw this out there as a way to as an outline for our call is it’s a buy versus build conversation. Buy means can I buy a company that gives me some strategic advantage that I don’t have already, something that I need or do I build it? And if I build it, that means I’m not going to buy it. It means I want to build it internally, which is hiring people and kind of growing organically that way. And I always look at these things through the lens of three kind of criteria. First is how much is it going to cost me to buy it versus build it? How long is it going to take to buy it versus build it? And what’s the probability of success? You know, that I’m actually going to accomplish the goal goal if against those who use cases, buy it and build it. And there’s a general rule of thumb, I would buy a firm if it was cheaper, if it was faster. And if the probability of success was greater, or at least I could contain the risk is doing acquisitions is never risk free. And those synergies you talk about sometimes don’t materialize. And merging disparate cultures can be a challenge. As you know, long lost their list is long as to how things can go wrong. So how do you think through and let’s just maybe take these one at a time. First off, do you consider buy versus build when you’re looking at this, or is it or do you some other framework to think about it? 

Colton Hathaway [00:05:42] Yeah, no, I think that’s an excellent framework to consider really for us, that kind of acquisition strategy, the first year post acquisition is stabilization mode, right? Merging the two teams, making sure there’s a culture fair, seeing if anybody is not a fit, how do you accept them gracefully. And really the the year post acquisition is stabilization mode. If you can wrap it up in a year and it doesn’t drag out for three or four or five years, then I would say be the appetite to buy instead of build is there. And just if the acquisition takes longer than two years, that’s kind of the point in which maybe you could build that over that two year period, right? So that’s one way to think about it is like, how likely is this to succeed in in fewer than two years? The other thing that sometimes comes in, and this is part of the acquisition valuation and things like that, is are you buying customers that are aligned with your existing service offering? How can we cross-sell and upsell into that new client base? Right. So that’s another part of it. If if there are opportunities where you can better serve their existing client base, if we can buy those customers instead of create them on our own, that’s another part of the equation. 

Greg Alexander [00:06:44] Yep. So let’s talk about a little bit around the the those two points to stabilization. So one year, can you get things stable in one year? Part of the challenge of buying services businesses as they say all your assets you know walk out the front door every day and there’s a lot of kind of turnover when acquisitions can happen. Now, there are some things you can do to mitigate that employee contracts, etc.. But you know, what advice would you give our members to stabilize as quickly as possible? 

Colton Hathaway [00:07:15] Yeah, this is an interesting one because, I mean, the the acquisition that we’re we’re still kind of towards the tail end of the two years. We’re over two years now on the acquisition. But we, we signed the deal or close the deal right as the pandemic hit. So we’re merging two cultures which historically have been very familiar with in-office work, the relationships that you’re building in office and things like that. And now we are through the pandemic into that or tackling that stabilization period, right? So there were some additional challenges, which I’m sure are going to be different moving forward now. Now we’ve got the macroeconomic climate and things like that and a difference, especially in the technology ecosystem, a different the talent pool has a different perspective than what it did over the past two years. The big thing that I would say and that we focused on was key relationships, right? So it’s like who is critical on both these firms who are vocal? I come from a change management background, and so I’m trying to figure out who are going to be change sponsors, who are going to be change resistors. How do we include both of those groups as part of this acquisition? And that’s a big part. It’s all about the people that are in the service based business, right? How do we make them comfortable and included with that change? 

Greg Alexander [00:08:23] And is that done during diligence? Is that done after the deal closes? 

Colton Hathaway [00:08:29] I think most of it has to happen after, right? Like if there’s going to be a small group, it’s going to be aware of the acquisition and part of that deal due diligence. But I mean, in our case, I mean, we’re dealing with hundreds of people and you can’t involve that entire stakeholder group as part of that due diligence. I mean, there’s a subset of us that knew what was happening, key, key people in that decision. But most of those people are going to have to bring on board after the deal closes and as announced. 

Greg Alexander [00:08:55] Right. So you take it a little bit of a leap of faith there that you’re going to be able to hold onto all those people. 

Colton Hathaway [00:09:02] Yeah, exactly. And that’s part of the calculation equation is it’s wrong to lose some good people and that’s part of the process. I think it’s important to identify who is very critical to this deal, who holds those relationships both internally and externally, and how do we incentivize them to be part of the new core. Yeah. 

Greg Alexander [00:09:17] Let’s talk about the next synergy you mentioned, which is the client list and the opportunity for cross-sell. We’ve got a group inside of collective 54 called the Post Exit Group, and it’s a very interesting leadership board. I think there’s about 12 people on it now. We’ve had in three years we’ve been around. It’s been, I think, 21 companies that were in the collective that have sold either entirely or part of their firm. So now there’s this group. That’s because we talk about grow, scale and exit. There’s this fourth group, the post exit group, and most of them are still there at the new entity. A lot of them were bought by private equity. And, you know, the theory is, is that they took some chips on the table, but the next part of the apple is going to be a lot bigger and it’s going to be bigger because they’re able to cross-sell services to each others client list. That has been more challenging than many had realized. Have you seen it to be challenging or has it been easy? And what have you done to facilitate the cross-selling of each other’s client lists? 

Colton Hathaway [00:10:24] Sure. I think there’s there’s two parts to that. One is is obviously just the health of the relationship. How much do they trust you? Like, how much are you an expert advisor versus hands on keyboard? You’re just doing what the client asked for, right? So, I mean, there’s two very different types of professional services firm and there’s multiple, but those are the two that I typically try to make sure that Northern is not seen as an order taker. Rather, we are the strategic advisory role and what we what solutions we bring to the table are in their best interest and it’s a mutually beneficial relationship, right? So, I mean, if if the firm that you’re acquiring is order takers, their client base is less likely to look at the new organization as that strategic partner. They want to continue business as usual. We know what we’re doing. You are here to to execute our vision. So that’s one thing, is like how strategic or advisory was the firm you’re acquiring? And is there the propensity for that client base to see an app or have an appetite for that new service offering? The other side of the equation is around like the breadth of services, right? So in our business, we work again a lot in retail, for example. Right? And so there’s two parts of our business, one being on on e-comm or digital experiences, the other on on marketing performance and things like that. And so it’s a very natural fit when a client comes to us for either development or marketing, we can cross or upsell the other side of that equation to give them a more holistic view of it that doesn’t exist in certain types of professional services. So I think it’s the kind of the service that you’re offering as well. Yeah. 

Greg Alexander [00:11:55] And when you’re thinking about what the pay for a firm are you factoring in some dollar amount that you think you’re going to get in cross-sell or is that just all gravy deal if it happens? 

Colton Hathaway [00:12:07] It really depends on on the valuation, whether you’re buying. I really like leaders agreeing for if you’re buying the clientele. If you’re buying like a leadership group and the team is going to continue to perform. There’s certain ways to structure that deal for like a buy out period or if they continue to perform versus certain times firms that they’re just wanting an exit and they’re done with the business and they want out, in which case you’re kind of it’s a hope and a prayer a little bit around that client base if they’re going to stick around with that new firm. So I think is probably case by case basis on on the relationship, on the structure of the team. 

Greg Alexander [00:12:40] Okay. And my last question is, I would imagine, given that you’ve done this successfully before, that you have access to the capital to pull these things off. And as I mentioned in the opening, you know, the price you got to pay for these things is come down a bit. Are you planning on doing more of these deals? Are you aggressive at the moment? Are you is it a wait and see approach? 

Colton Hathaway [00:13:01] Yeah, I think and again, in this macroeconomic climate, everybody is focused on on cash and surviving the storm, so to speak. I mean, speaking in terms of like what we’re seeing on our different partners, like their pipelines are a little weak. I think in hearing with other like a 54 members, that’s pretty typical kind of heading into this type of economic climate. That said, if a deal presents itself, there’s always money to be made during this type of climate, right? This macroeconomic climate, there there will be a lot of money made and those that execute successfully against us, we’ll see that at the other end. Right. So there’s always deals on the table. We’re always watching whether or not we’re going to take action on some of those. That’s to be seen. But there’s always deals. 

Greg Alexander [00:13:42] Yeah. Awesome. Well, listen, Colton, we talk an awful lot here in Collective about selling your firm. I don’t think we talk enough about buying firms. So this was a real contribution, a net new incremental knowledge for us. So on behalf of the membership, appreciate you being here and and contributing. 

Colton Hathaway [00:13:59] Thanks so much for having me. 

Greg Alexander [00:14:00] All right. All right. So let me give a couple of calls. Action here in closing. So if you’re a member, be sure to attend the private Q&A session with Colton, which will happen on the Friday. We’ll get the boutique session meeting invite out to you, and you’ll have an opportunity to spend an hour with him and directly ask your questions. Also, if this is something that you want to do, I’ll direct you to collect the 54 as new companion courses for both the boutique and the founder bottleneck. These are online online learning programs that give you real kind of detailed how to a couple of templates in there. In particular the buy versus build template, which I mentioned earlier. And we also have a basic post acquisition implementation plan template that might help you so directly to those things. If you’re not a member and you think you might want to become one, go to collect collective 54 Adcom fill out a contact us form a representative will get in contact with you and discuss, you know whether you qualify for membership and you know how you might benefit by meeting people like Colton and getting access to these tools. If you’re not quite ready to join, but you want to educate yourself, subscribe to collect 54 insights. You get three things every week on Monday, a blog on Wednesday a podcast, and on Friday a chart. And that’ll be a way to keep track of us and educate yourself on the types of things we talk about. All right. Well, that was a lot in 15 minutes. Appreciate your attention. Thanks for listening to our podcast. And until next time, I wish you the best of luck.