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What Happens To Your Small Company After An Acquisition?

Sept. 7, 2022
A purchase of a small, entrepreneurial company by a big corporation has lots of potential benefits and pitfalls – for both sides.

Getting acquired by a big company is what many entrepreneurs dream of. There can be almost a fairy-tale romance aspect to it, with a big payoff instead of a big wedding.

But what happens after the honeymoon?

Integrating a newly acquired company, especially a small, entrepreneurial one, is one of the trickiest challenges in strategic planning. The new owner must grapple with issues like what kind of help to offer the acquired company, how separated from its new owner it should remain, and even what to do with the entrepreneur who started it in the first place.

Buying up entrepreneurial companies, especially innovative ones, has always been a major strategy for big food corporations, and it’s becoming increasingly popular. Acquisitions occur in product lines that are completely in line with existing products, like Mondelēz’s purchase of cookie company Tate’s Bake Shop in 2018, or completely unrelated, such as General Mills’ 2018 purchase of Blue Buffalo, marking its first (and highly successful) foray into pet food.

Acquiring a startup with an appealing product line is a good shortcut to product innovation; someone has already done the innovating and proven that a market exists. This becomes especially attractive in companies that have impacted their ability to innovate by cutting back their R&D budgets.

Steven Hill, a vice president at T. Marzetti, says major food companies have been grappling for more than 20 years with the question of in-house innovation versus acquisitions. Many of them found that a decision to cut back on R&D has consequences for years, because the innovation pipeline dries up.

“Acquisition becomes a very attractive approach in terms of filling that pipeline, and the question then becomes the cost tradeoff,” Hill says. “Is it more costly to acquire something externally that may have a proven product or at least have some traction in the marketplace, albeit on a small scale, versus trying to create something internally and using a company’s scale and might to put it into the market and then support it?”

Of course, courtship is a two-way street. The entrepreneur has to be concerned about a potential purchaser respecting her company’s individuality and maintaining the integrity of its products.

When Angie Bastian was considering offers for Boomchickapop, the gourmet popcorn snack she had developed, she had several to choose from. With the help of an investment bank, she evaluated them and settled on Conagra, to which she sold Boomchickapop in 2017.

Angie Bastian sold Boomchickapop, a popcorn-based snack, to Conagra Brands in 2017.

“We liked their leadership team. They were honest and transparent with us,” Bastian says. “They appreciated and valued the empowered brand and company that we built. They had extensive experience in popcorn. In the end, for me it was about my confidence in Conagra as stewards of the brand, product and our employees.”

More good stuff

One of the biggest potential advantages of an acquisition, from the entrepreneur’s perspective, is additional resources. Large parent companies can bring power to bear on pretty much every operational aspect, from R&D to procurement to production and distribution.

Bastian hasn’t been directly involved with Boomchickapop since the end of the first year after the sale, but that was long enough to see advantages from Conagra’s ownership. “What impressed me was the sheer scale of resources that big food companies possess, like Conagra,” she says. “Where we had a three-person sales team for a specific account or category, it seemed like they had 300 people. Amazing!”

Conagra expanded production with an additional location. “Given Conagra’s expertise in manufacturing and extensive knowledge of popcorn, scaling growth on this business has been successful and in line with expectations,” says Audrey Ingersoll, Conagra’s vice president and general manager of sweet treats.

Seth Goldman sold Honest Tea to Coca-Cola in 2011, only to have the line discontinued this year.

Sourcing is another major area where a large new owner can have a big impact. When Seth Goldman sold Honest Tea, his line of organic teas and other beverages, to Coca-Cola in 2011, it led to a benefit for Honest Kids, a line of juice beverages for children: no more added sugar.

“When we first created Honest Kids, it was sweetened with sugar,” Goldman says. “And then with Coca-Cola, we were able to develop a supply chain so that we sweetened it only with fruit juice, which was a real enhancement to the product.” Coca-Cola was able to do this because it could source enough fruit juice concentrate to replace the sugar. Similarly, Coca-Cola was better able to procure the single-serve PET bottles that Honest Tea had had a hard time getting.

Cultural issues

The changes that an acquisition usually brings go beyond operational matters. They extend to the essence of a company: the culture, attitude and approach that both leaders and workers bring to their tasks.

Integrating corporate culture is one of the biggest challenges in any acquisition, especially when a small company gets absorbed by a larger one.

“An acquisition of any size or scale involves the ‘marriage’ of two different cultures,” says Trip Tripathy, a principal in business consulting services for Kaufman Rossin. “In fact, culture is one of the biggest reasons acquisitions/mergers fail. All the more important for the larger company to understand that it would be easy to impose its dominant culture on the smaller company without thinking about the impact on the small company, which could lead to significant issues.”

One of the biggest issues in merging corporate culture is simply deciding how much, and what kind, of help the acquiring company will bring to the new one. In some cases, there is so much potential for help that it can be overwhelming.

Chuck Davis, an operating partner at Arbor Investments and a former Kraft Heinz executive, says that in the wage of a new acquisition, it’s common for representatives of the new company to come in trying to help, asking a lot of questions, making requests for data, offering suggestions and basically offering help with everything. “It overwhelms the entrepreneur, and culturally, the entrepreneur is not ready for that,” Davis says.

The best approach is to concentrate on specific needs. “So instead of the big company telling the small guy they just purchased all the stuff they’re going to do and what they need, let the entrepreneur work with you and determine ‘These are the three or four areas we’re going to focus on for your help.’ ”

One of the biggest potential areas of conflict has to do with specialization of tasks – or the lack thereof. A nearly universal feature of startup companies of all kinds is that most of the employees, from the founder down, have to wear multiple hats. The production chief might also be in charge of logistics; a salesperson might also have a hand in procurement. It’s all part of the flexibility required of a new business.

“The entrepreneur is required to find a solution to every impossible problem just to live another day to compete and she/he might be awake all night trying to figure it out,” Bastian says. “There is no passing it on to the next team or someone more senior. You and your ragtag team figure it out, and in that process innovation happens.”

But large corporations usually don’t roll that way. They are more likely to have experts in specific business functions and to segregate those functions more rigidly. That approach is usually more efficient over the long term, but it runs the risk of robbing the acquired company of some of its character or personal touch.

“What you end up finding out is that some of the magic that smaller entrepreneurial company had, with a few people who are very talented and skilled at doing certain things – they kind of get pulled off of doing those things or become more of an advisor, and slowly over time, it doesn’t seem to work the same way,” Hill says. “The magic or the special sauce that they brought to the equation starts to get lost.”

Fight over values

Other areas of conflict can come up between an acquired company and a parent, even long after the acquisition. One of the highest-profile ones came just months back when the board of directors at Ben & Jerry’s filed a lawsuit against Unilever, its parent company since 2000. The issue was the sale of Ben & Jerry’s ice cream in the Israeli-occupied territories.

Ben & Jerry’s announced in 2021 that it would no longer allow its products to be sold there, in protest of the Israeli occupation. Unilever responded by selling the Israel franchise for Ben & Jerry’s to a distributor who vowed to keep selling it in the occupied territories (and who had previously sued both Ben & Jerry’s and Unilever over the issue). Ben & Jerry’s board voted 5 to 2 to sue Unilever, which it did in June; the two dissenting votes came from Unilever’s representatives on the board.

“If left unaddressed, Unilever’s actions will undermine our social mission and the essential integrity of the brand, which threatens our reputation, and ultimately, our business as a whole,” Anuradha Mittal, chair of the Ben & Jerry’s Board, said in a statement.

Hill says that these kinds of conflicts can be expected, especially when the acquired company was founded with specific social-justice principles in mind: “A lot of these smaller entrepreneurial companies are cause-based companies, meaning that they have a pretty strong purpose statement of why they exist.”

Sometimes a disconnect between a parent and an acquired company happens for more prosaic reasons: it’s no longer a fit. That’s what Goldman found this year when, 11 years after the acquisition, Coca-Cola informed him that it was discontinuing Honest Tea. With Gold Peak and other tea brands, Coca-Cola’s tea portfolio was getting crowded, and single-serve bottles were becoming hard even for Coca-Cola to source. But Goldman says he has no regrets.

“If I were to do this all over again, given everything that happened, I feel that Honest Tea was too small at the time of the purchase, meaning it didn’t have enough of its own critical mass—there was no question that it needed to grow,” he says. “And so I think that obviously became an issue when Coke had to make some hard decisions. But I don’t regret the decision to partner with Coca-Cola, and I’m still proud that Honest Kids is out, growing, and doing what it’s intended to do.”

Goldman went on to co-found Eat the Change, a vegan snacks company.

What next?

Stories like Goldman’s point to an interesting, and often vexing, situation when entrepreneurial companies are acquired: What happens to the entrepreneur?

Goldman’s responsibilities as head of Honest Tea stayed the same for about three years after the 2011 acquisition. In 2015, he shifted to a part-time role, stepping away fully at the end of 2019. Bastian, after the 2017 sale to Conagra, became a brand ambassador for Boomchickapop for two years, and has now retired from active participation with the brand, except for weighing in when Conagra sends her the occasional update.

There are several options for entrepreneurs once an acquisition is complete: staying on as an employee of the parent company, serving as a consultant, or immediately withdrawing. Various factors on both sides – the entrepreneur and the new owner – come into play.

Advisors who specialize in integrating acquisitions say that it’s best to have some kind of roadmap in place to eventually disconnect the entrepreneur from the acquired company. The first step is realizing that no one is irreplaceable – not even a company founder.

“Sometimes you think, ‘Oh, the business will die without this person after a year,’” says Nathan Gampel, founder and CEO of Simpel and Associates LLC. “But I would say back to the investor, ‘If you’re buying a business that is so entangled with one single person, should you really be buying that business?’ ”

Gampel says that when deciding how long to keep an entrepreneur around, the acquiring company needs to balance the necessity for retaining her expertise against what he calls “the jerk factor” – an entrepreneur’s inability to adjust to the new ownership situation.

“Is this person going to be a jerk? Is this person going to create friction?” Gampel says. “Is this person going to create problems for leadership because she might feel that she would do something one way, only now it’s owned by someone else, and they’re taking her baby and changing it?”

Tripathy of Kaufman Rossin says that it’s common for entrepreneurs to have a tough time letting go. “If unique expertise is not a consideration, I would opt for a consulting role for the founder for say 12 months - perhaps tied to holding back 10% to 20% of the purchase price, which would be paid out at the end - with a full departure at the end of that period.”

Acquiring innovative companies is a great way for big corporations to refresh their product portfolio, but integration of the new company is often fraught with challenges. Handling them properly ensures that the acquisition fulfills the potential that inspired the purchase in the first place.

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