If you’ve ever been part of a failed acquisition, or botched integration between a smaller organization and a larger one, you know how painful the process can be.
As funding dries up for DTC brands that raised at large valuations in the early 2020’s, a larger and larger share of eCommerce strategy today relies on the consolidation of teams, processes, and technologies.
Today on Insiders, we’re going to cover four mistakes that businesses make when integrating DTC teams into larger holdcos, private equity plays, mergers, or acquisitions; and we’re going to discuss the nature of these integrating cultures and pitfalls to avoid.
Want to go even deeper? This piece comes courtesy of the most recent episode of the Infinite Shelf podcast where hosts Orchid Bertelsen (Common Thread, Nestlé Foods, Dentsu) and Ingrid Milman-Cordy (Nestlé Health Science, Nuun, e.l.f., Ann Taylor) talked about their experiences in integrations, and how acquisitions can be make-or-break for both parties involved.
Check out Infinite Shelf for more DTC hot-takes and advice!
Mistake #1: Underestimate the Legacy of the Founder
If you really want to screw up an acquisition, the best place to start is to undermine the credibility of, or underestimate the importance of, the founder and their leadership team.
To address the importance of a healthy business that has the ability to grow, it is crucial for DTC companies to focus on building a strong foundation. This includes ensuring profitability, having a clear vision and purpose, and establishing a unique value proposition or "secret sauce".
Part of that secret sauce is the legacy of the founder.
“The idea of what your legacy is, how you made your mark on your category, on your industry, on your target audience matters,” says host Ingrid Milman-Cordy. Part of the success of businesses in the DTC space was customer affinity to the founder or the founder’s story. This humanized the brand, says Cordy. "The humanization of brands makes a three-dimensional, four-dimensional being out of the brand,” she expands. The “secret sauce” of many companies is the team, and that team is usually in lock-step behind the CEO; the face of the brand.
Founders of successful brands must carefully consider potential acquisitions and the impact they may have on their legacy and decision-making power. This includes asking for the right people to help support the acquisition.
When inviting outside advice, founders should choose individuals who understand their business, share their vision, and can act as champions for their brand.
Mistake #2: Overestimate the acquirer's responsibility to solve problems post-acquisition
Small DTC teams often glamorize the resources and the processes that larger acquiring companies have. But for all their resources, they often lack answers for the types of problems that modern eCommerce businesses have.
Beyond their lackluster problem-solving ability in a dynamic channel like eCommerce, acquirers are typically spoiled for riches with data, processes, and prior history. In short, they have a “way of doing things” that is often slower-paced, or more deliberative than the DTC brand is used to.
“There's a reason why acquisitions don't have the most fantastic reputation for succeeding post-acquisition,” says Cordy. “No matter how well-intentioned, well-positioned, well-experienced the acquirer.” Often, it’s because large companies don’t know how to solve small company problems.
This leads to a key principle for anyone experiencing the trauma of acquisition. The founder and team running the DTC business should be emotionally prepared for the possibility that the parent company may make strategic decisions about how to use the brand that they may not necessarily agree with. Post-acquisition, the brand is no longer theirs.
Mistake 3: Overlook the need to be approachable and accessible as the company grows
This is the part where people like to use the word “synergy” — often, an acquirer will look for areas of overlap where existing teams can absorb the roles and responsibilities of existing cost centers of the DTC brand.
These “redundancies” can create friction for DTC teams that have achieved success because of their extreme attention to detail.
In order to achieve “synergies” you must expend energy in the business by redoing work that has already been “solved” with modern tooling. Legacy acquirers are more likely to be using Salesforce across the org than they are Gorgias + Shopify. This presents a problem, and an inflection point for both teams; and it often means that the DTC team has to spend long hours re-platforming and shifting agency partners, rather than focusing on growth.
Which, of course, makes hitting your 12- and 24-month goals that much harder.
Customer service teams, technology platforms, and communication channels that allow customers to easily reach out and engage with the brand are replaced by “efficiencies” that can feel less warm, or less welcoming than the existing customer base is used to. This creates churn, and churn creates heartburn for leadership.
Mistake 4: Hiring people who do not understand your business or share your vision
For a small DTC post-acquisition, the bureaucracy can work for some, and against others. New hiring practices may prioritize a field of candidates that looks across the organization, including portfolio companies or replaces a longtime staffer with a more impressive candidate.
When performing succession planning for DTC, the team needs to adapt to a new culture. That culture can come with new challenges, new ideas, and more overhead when making decisions.
A rule of thumb — the culture of the smaller organization is more likely to adapt than the larger org; unless that culture is the specific target of the valuation or the reason for the acquisition.
Again, citing Ingrid Milman-Cordy from Infinite Shelf:
[At Nuun,] there was a heavy emphasis on equitable pay and being transparent in our pay structures and in our leveling, being transparent in our how we're hiring, our hiring practices. We would do a lot of things like removing people's names from resumes so that we can just look at the actual talent and try to not give in to like even just our subconscious prejudices…There were acquirers… that saw a ton of value in that, not just internally but externally, and telling that story. And that was sort of built into our valuation.
There are a number of ways that acquisitions can fail; but none so spectacularly as the lack of understanding of how team culture is developed and cultivated.
The future of commerce depends on a healthy cycle of innovation and entrepreneurship, and for that innovation to create enterprise value, and to attract potential acquirers.
Sure, there are more than four ways to screw up an acquisition. Chief among them, though, is having misaligned motives and a lack of transparency.