Buying a Brand Without Going Bust

What entrepreneurs can learn from the hubbub over Twinkies, Sno Balls, and Wonder Bread.

It’s the end of an 82-year era. Hostess Brands is officially in bankruptcy. There are dozens of potential buyers swarming over its assets like, well, ants on a Twinkie. These buyers run the gamut from food retailers to food products powerhouses (think ConAgra or McKee, which makes Little Debbie) to financial acquirers (like C. Dean Metropoulos, which already owns Pabst Brewing and Chef Boyardee).

Although there’s some minimal interest in the company’s factories and manufacturing equipment, the real power here is in the brands, which could bring in as much as $1 billion. Twinkies, Wonder Bread, Sno Balls, and all the other Hostess products come pre-packaged with decades of consumer loyalty and a genuine connection to our national identity. Who hasn’t heard the popular belief that only Twinkies and cockroaches will survive the apocalypse?

Are these buyers making a smart business decision, or are they just caught up in the feeding frenzy? When you have the opportunity to buy a brand in your industry, there are four critical factors to consider.

Speed. Right now, the media buzz around these confections is at a high. Restaurants like Original Baby’s Cheesesteak are giving out free Twinkies to market their new Twinkie Milkshake [http://www.nbcchicago.com/blogs/inc-well/How-to-Market-to-Hostess-Doomsayers-181919711.html], and internet guides explain how to stock up in preparation for the impending dearth of Ding Dongs (“The key is to find them in local gas stations.”) [http://www.dailytitan.com/2012/12/farewell-hostess-no-longer-mostest/] In perhaps the classic example of the American entrepreneurial spirit, single Twinkies are now being listed on eBay with starting bids of $10. Any transaction will need to move quickly in order to capitalize on consumer interest.

Compatibility. In addition to doing the deal efficiently, a brand buyer needs to be able to quickly get the product back into production and deliver a relatively uninterrupted to supply to its new loyal customers. Simply put, your company must already be in the industry. The intangible brand value you’re buying becomes worthless if your die-hard Wonder Bread fans switch to Sara Lee while you’re ramping up.

Encumbrances. Does the brand come with problems that contributed to the parent company’s downfall? In the case of Hostess, the primary cause of their bankruptcy is indisputably the conflict between company management and the unions. Hostess had accumulated 372 different collective bargaining agreements over the decades, some with absurdly archaic provisions. Most ridiculous: Until recently, cake products and bread products had to be delivered to the same store in two separate vehicles, as some workers were allowed to load cakes into trucks while others were responsible for loading bread. Prospective buyers are chomping at the bit because they’ll be acquiring Twinkies or Sno Balls free from these union contracts. The new owner will have the ability to either manufacture with a non-unionized workforce or renegotiate the contracts.

Profitability. If you’re buying a brand that isn’t profitable, it must have the potential to be profitable again. That sounds obvious, but too many company owners buy a failing brand without a solid strategy for how to turn it around. Then they’re surprised when the acquisition doesn’t make any money for them, either. Did Hostess lose money because there’s simply no consumer demand for its products, or could a different strategy make Twinkies profitable again?

The truth is that new, competent leadership is likely to make a world of difference, because Hostess was just not a well-run company. Their profits had been steadily dwindling. They’d gone through two bankruptcies and six CEOs in the past ten years. Workers claim that management consistently failed to invest in product upgrades. They didn’t adjust well to changing market pressures, like increased consumer demand for healthy snacks, and they didn’t do a good job expanding their customer base. If the Hostess acquisitions are to be successful, the buyers must understand why the brand was failing and have a plan to ensure they don’t make the same mistakes Hostess did - and that plan has to complement the buyer’s long-term strategy for the rest of the company!

These factors are just as important for brand acquisitions among smaller companies. Although few brands have the immediate national name recognition of Hostess, the names that everyone knows in your industry or market segment have just as much power as Twinkies do in the consumer products world. If you can quickly buy a compatible brand, free of encumbrances, and put a solid turnaround strategy in place, your company profits could multiply exponentially. You can bet that if I owned a food products company, I’d be trying to buy Twinkies myself.

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