Small businesses facing financial hurdles aren’t the only ones who sell out to large corporations.
There can be many reasons - as well as results, both good and bad - when a local brand is taken over by corporate America.
Consumers are concerned that product quality will change, employees worry about getting laid off and small business owners are left to wonder what will happen to the companies after they sell.
Meanwhile, big businesses aren’t necessarily open about exactly why they want to buy.
“They just have a far different agenda than what the typical seller thinks,” says Jack Garson, attorney and author of “How to Build a Business and Sell it For Millions.”
Here’s a look at why small companies might look to sell and the impact the move can have on loyal consumers when corporations take over.
Beating the Competition
Some small companies, like Ben & Jerry’s ice cream, are so beloved that big competitors are compelled to eliminate their competition simply by buying them. That’s precisely what Unilever (Stock Quote: UN), the makers of Breyer's, did in 2000 when it spent $326 million to take over the brand.
Ben & Jerry’s became popular because of its delicious, creatively-named flavors and its liberal social statements. These were qualities that Unilever appeared to value, at least with their financial benefit in mind. The company promised co-founder Ben Cohen some say in the social stance of the company, presumably to convince him to sell, according to AllBusiness.com.
And while Unilever took out one of its competitors, it expanded its customer base and store locations as well, a fairly common reason big businesses buy smaller ones, says Garson.
Many consumers insist on only buying local and supporting small businesses, but takeovers and partnerships with larger companies aren’t always bad for consumers, since access to brands often gets easier after a takeover.
Access to consumers can actually be a difficult hurdle for some small companies when the logistics of distribution and related costs come into play.
Before it teamed up with Coca Cola Enterprises (Stock Quote: KO) in 2007, Energy Brands, the maker of Vitaminwater, lacked a solid distribution network. At first, it was only available in New York, then gradually spread to Los Angeles, eventually landing in the big cities like Chicago, Seattle, Philadelphia and Detroit, according to BevNet, a beverage industry publication. The small, New York-based business was only able to sell its flavored and nutritionally-enhanced waters at nearly every grocery store and bodega thanks to Coke’s $4.1 billion acquisition of the company.
Another example is Honest Tea, which could only be found in natural food stores before the company sold a 40% stake, worth $43 million, to Coke in 2008. Now the bottled teas are available at mainstream stores like Stop & Shop and 7-Eleven.
Similarly in 2006, Winebow, a small wine distributor, bought the Boston Wine Company expressly to expand its distribution into Massachusetts.
In the technology world, smaller companies are often acquired simply because a rich company wants their patents.
For instance, Google (Stock Quote: GOOG) bought a startup search site called Metaweb just to get a hold of the company’s data storage system and improve Google’s own search tools, says TechCrunch. Exactly how much Google paid for Metaweb was never disclosed, but considering Google’s size, it was likely a pretty penny.
At the same time, smaller tech companies often lack the resources to grow on their own. Science-focused firms can have trouble coming up with the money just to get off the ground.
The biggest challenge: “First and foremost … the balance between raising equity … and the need to grow the business and fund new projects,” says Robert W. Hubert, president and CEO of EKOS Corporation, a small biotechnology firm.
Specifically, research and development, testing, legal fees, manufacturing, quality control, sales and marketing are costly in-house operations, so working with a larger company may be ideal. Hubert, however, wouldn’t say whether he planned on selling his company.
When Owners Retire
Retiring can be a difficult move for small business owners who don’t have a partner or family member to take the reins, especially in cases when a founder’s own funds, along with blood, sweat and tears, have been used used to build a company from the ground up.
“If you don’t stay around, it’s very hard to protect the culture, the values and what comes with it,” Garson says.
One reluctantly retiring small business seller that Garson advised was concerned about what might happen to his close-knit group of employees when he sold his company for $150 million.
He had owned the company for decades, took good care of his employees and couldn’t be sure they’d be treated as well when big business took over.
So instead of banking all $150 million, he gave $40 million of his money to his workers, Garson says.
The Good and the Bad
Anne Headley’s parents lived in Heritage Hills, a privately-owned retirement community in Hendersonville, N.C. When the facility was bought out by Emeritus Corporation, things went downhill, she recalls.
Fees were doubled and the service was awful, she says.
“I remember my mother saying that instead of scooping out mashed potatoes with a serving spoon, they were using an ice cream scoop to make the servings all uniform. I thought she was just complaining, but it turned out to be symbolic of the way things were,” Headley explained.
On the other hand, when Downington National Bank in Downington, Pa., was taken over, restructured and renamed DNB, Shirley Landis VanScoyk was relieved.
“It was an awful small town club before … I was a member of this bank for 20 years, handed them documents with my name on them once a week but never once was called by name until now,” VanScoyk says. “It was a horrible, closed minded, pedestrian experience before,” she adds.
And big business has been a plus in other areas in Downington, according to VanScoyk.
“We have a small grocery store that has abysmal service,” she says. “Everyone in town laughs about it, but it does send you down to the Wegman's once in a while, when you just want to be somewhere you know the service will be great and quick and without drama, even if it costs more!”