What happens to your small company after an acquisition?
The following is an excerpt. To read the full article, see the link below.
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.
“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.”
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.”
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.
Read the full article at Food Processing
N.K. Tripathy, MBA, CPA, CGMA, is a Strategy, Talent & Boards Principal Emeritus at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.